If you own a small limited liability company or closely held corporation, it may seem burdensome to comply with all of the requirements in your company’s governing documents (such as an operating agreement). For example, it may be inconvenient to hold annual shareholder meetings or to maintain all corporate records at a specific location. It may also seem unnecessary to maintain a separate bank account for the company (and to never commingle the funds between your company and individual bank accounts). However, adhering to such corporate formalities may be far more important than you think.
Generally, when a limited liability company or corporation is sued, the plaintiff cannot reach the assets of the underlying members or shareholders. This is one of the main reasons why individuals choose to form limited liability companies and corporations. In New Jersey, under a doctrine called “piercing the corporate veil,” a court may disregard the corporate structure (and allow a plaintiff to collect against the assets of the underlying members, shareholders, officers and/or directors) if the court determines that the corporate entity is being used to defeat the ends of justice, to perpetrate fraud, to accomplish a crime, or otherwise evade the law.
The main factors that courts look to in determining whether to pierce a corporate veil are as follows:
- Undercapitalization of the company;
- Failure to observe corporate formalities;
- Siphoning of funds of the company by the dominant member/shareholder;
- Absence of corporate records;
- Pervasive commingling of company assets and identities;
- The company is being used as a facade for the operations of the dominant member/shareholder;
- The company is insolvent at the time it enters into particular debts; and
- Two such companies have identical owners.
If you wish to ensure that your corporate structure will be protected, it is essential that you adhere to all corporate formalities, maintain a separate bank account for the business, and never commingle company and personal assets.
Spector & Ehrenworth, P.C. has extensive experience advising members, shareholders, directors, and officers regarding their obligations as set forth in governing documents and as required under New Jersey law. Attorneys at the firm would be happy to discuss with you the specifics of your company and help you to determine whether you are satisfying all such obligations. To schedule an appointment to speak with a business attorney, call (973) 845-6525 or e-mail firstname.lastname@example.org.