Piercing the Corporate Veil – Factors to Follow to Avoid Personal Liability
Corporations are a ubiquitous part of modern life. A corporation is a legal entity that exists separate and distinct from its owners. Advantages of a corporation include limited liability for its shareholders, a perpetual existence and ease of transferring ownership interests. Corporations come in two forms, C corporation and S corporation, and each has distinct advantages and disadvantages. The C corporation is the most common form of incorporation. It is a separate legal entity that is owned by shareholders. Most large, publicly traded companies are C corporations. S corporations combine most of the advantages of C corporations with a better tax structure for the owners. The income of an S corporation is not taxed at the corporate level. Instead, the reported income is passed through to the owners where it is taxed at personal tax rates.
Corporations enjoy a type of personhood and have at least some of the legal rights and responsibilities enjoyed by natural persons – the ability to enter into contracts for instance. But corporations are very much a legal construct and to maintain the benefits of the corporate form, corporate formalities must be followed. Owners who fail to take the appropriate steps to maintain the corporation as a separate entity run the risk of having the “corporate veil pierced” and being held personally liable for any corporate transgressions.
Under West Virginia law, see e.g., Laya v. Erin Homes, Inc., 177 W.Va. 343, 347, 352 S.E.2d 93, 98 (1986), Courts consider a number of factors where a litigant attempts to pierce the corporate veil. These factors include the identity of the directors and officers of two entities who are responsible for supervision and management (a partnership or sole proprietorship and a corporation owned and managed by the same parties); the absence of separately held corporate assets; the use of a corporation as a mere shell or conduit to operate a single venture or some particular aspect of the business of an individual or another corporation; use of the same office or business location by the corporation and its individual shareholder(s); employment of the same employees or attorney by the corporation and its shareholder(s); disregard of legal formalities and failure to maintain proper arm's length relationships among related entities; use of a corporate entity as a conduit to procure labor, services or merchandise for another person or entity; or the use of a corporation as a subterfuge for illegal transactions.
While corporations are fairly straightforward to establish, their continued existence requires constant attention and nurturing to maintain the advantages and benefits of the form. For any West Virginia business owners thinking of incorporating, it is important to understand and remain mindful of the Laya factors to maximize the benefits the corporate form offers.
Today's blog: Ever heard the phrase "piercing the corporate veil"? Zak Zatezalo breaks down for us what exactly that means and shares an example from a 1986 West Virginia court case to explain how to do so while avoiding personal liability charges.