As the COVID-19 pandemic continues to wreak havoc across the globe, business owners are consumed with keeping their businesses, employees, and their own families afloat. With the economy grinding to a halt, business owners are understandably concerned about whether the legal obligations of their business can shift to them personally during these uncertain times. An individual business owner’s insulation from the liabilities of his or her business is a basic premise of corporate law, but when can the “corporate veil” be lifted?
In short: the bar is extremely high. Only sufficient allegation of facts showing that the owner abused the privilege of doing business through his or her domination and control of the entity would result in personal liability. The fact that a business is short on cash to pay a vendor, for example, is not enough on its own to extend the company’s liability to its shareholders. Here, more specifics that prudent business owners should know.
THE BAR IS HIGH
While courts are empowered to pierce the corporate veil in appropriate circumstances, they often yield to the well-established principle that businesses incorporate precisely for the purpose of insulating their owners from personal liability. As such, efforts to disregard the corporate form are not taken lightly. A party seeking to “pierce the corporate veil” bears a heavy burden: in a lawsuit, the party must set forth very specific facts demonstrating that (1) “the owners of a corporation, through their domination and control of the corporation, (2) abused the privilege of doing business in the corporate form to perpetrate a wrong or injustice against a party such that a court in equity will intervene.”[1] What does “abusing the privilege of doing business in the corporate form” look like? A court will consider (1) the absence of the formalities or failure to follow corporate formalities; (2) inadequate capitalization; (3) commingling of assets, and (4) use of corporate funds for personal use.[2]
SPECIFICS, NOT GENERALITIES
A lawsuit merely claiming in a conclusory matter, without specifics, that a corporation is “dominated” or “controlled” by a shareholder will not succeed. Simply because corporate officers participate in day-to-day operations of a corporation does not warrant that the corporate veil be pierced (indeed, that’s precisely what owners and corporate officers should be doing). Even allegations of bad faith aren’t enough: the party seeking to pierce the corporate veil must articulate that the abuse of privilege by the corporate owner creates a nexus between the abuse of corporate form and the transactions or occurrences at issue.
THE TAKEAWAY
The current business climate is raising questions and challenges no one has experienced before. Piercing the corporate veil to impose personal liability on an owner is not a decision any court would make lightly. Absent abusing the privilege of doing business as an incorporated entity before this crisis hit, and absent taking such abusive steps to shield oneself from personal liability after the fact, business owners can focus on the many other issues demanding their attention right now – not worrying about their own personal liability with respect to the obligations of their business.
[1] Morris v. New York State Department of Taxation and Finance, 603 N.Y.S.2d 807, 811 (1993); East Hampton Union Free School District v. Sandpebble Builders, Inc., 66 A.D.3d 122, 126 (2d Dep’t 2008).
[2] See, e.g., Peery v. United Capital Corp., 924 N.Y.S.2d 470, 473 (2d Dep’t. App. Div. 2011)
