One of the greatest advantages to forming a corporation is to avoid personal liability and debts of the shareholders. Are there situations where the personal liability benefit does not apply?
Sometimes, courts find that the shareholders have “pierced the corporate veil”, making them personally liable for business debts. Courts may determine that a corporation has “pierced the corporate veil” if it is merely a shell or instrumentality of the shareholders or members. In other words, if the corporation serves no legitimate business purpose and is used primarily as a vehicle to commit fraud or promote injustice, it likely pierces the corporate veil. Iowa courts have consistently used these factors to determine if a corporation has “pierced the corporate veil”,
- Was the corporation undercapitalized?
- Did the corporate participants follow corporate formalities?
- Did the corporation keep separate books?
- Were corporate finances kept separate from individual finances?
- Was the corporation used to promote fraud or illegality?
- Was the corporation “a mere sham”?
If these factors lead to the conclusion that the business served a limited business purpose and was primarily used as a tool to advance individual interests, courts have found that the partners are not entitled to the protection of individual liability reserved for legitimate business entities.
Taking the proper steps to ensure that your corporation has solid structure and distinctiveness is essential to protect individual liability. The attorneys at Simpson, Jensen, Abels, Fisher & Bouslog, P.C. are experienced in handling complex corporate issues. Contact us at (515) 288-5000 to discuss your business with our firm.
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