Maintaining the Corporate Form and Its Protections

I’m getting my annual continuing legal education credits at the Indiana Law Update. An item that just got mentioned is nothing new, but worth knowing for many people are the factors that will be considered when a court determines whether or not to shield an individual from liability for actions taken, at least ostensibly, as part of a corporation.

Just a brief aside – I’ve long been skeptical of the compatibility of the corporate form with libertarianism and with conservatism where principles of personal responsibility and small government figure prominently. The corporate form is a government construct that exists primarily to shield individuals from liability for the consequences taken by them or on their behalf.

Anyway, the factors a court will consider when determining whether to “pierce the corporate veil” — in other words, expose the individual to liability for actions taken under cover of the corporate form:

1. Under capitalization.
2. Absence of corporate records.
3. Fraudulent representation by the corporation, shareholders, or directors.
4. Use of the corporation to promote fraud, injustice, or illegal activities.
5. Payment by the corporation of individual obligations.
6. Co-mingling of assets and affairs.
7. Failure to observe required corporate formalities; and/or
8. Other shareholder acts or conduct ignoring, controlling, or manipulating the corporate form.

The ones I’ve put in bold are the ones that, in my judgment, can be relatively common – particularly among small corporations, LLCs and the like. So, pro-tip: f you do business under a corporate form and want to keep your individual assets protected if a business activity goes south, you want to keep your personal finances separate from your corporate finances, and you want to keep records.