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Boulder City Magazine® April 2006 Issue
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Lawyer's Edge
by Rodney S. Woodbury, Esq.
Woodbury, Morris & Brown
Piercing The Corporate Veil
Business owners often incorporate to shield themselves from personal liability. Indeed, one of the principal advantages of forming a corporation is the veil of liability protection that it affords to its principals. However, the corporate veil is not bullet-proof. In certain instances, creditors and others that have been injured can pierce the corporate veil, obtain a judgment against its principals, and seize their assets.
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Nevada has established a 3-prong test to determine whether victims and creditors will be permitted to pierce through the corporation’s cloak of protection. Essentially, they must show that the corporation is the alter ego of its principals by proving that: (1) the corporation is influenced and governed by those individuals; (2) there is such unity of interest and ownership that one is inseparable from the other; and (3) adherence to the corporate fiction would serve to sanction fraud or promote injustice. The burden of proof is substantial but not insurmountable.
While each corporation will be judged on its own merits, those who wish to take advantage of the corporate shield would be wise to avoid certain acts and omissions that could potentially expose them to personal liability. Courts look to such factors as co-mingling of funds, undercapitalization, and failure to observe corporate formalities. For instance, courts have permitted piercing in cases where principals mix their own business activities with those of the corporation and share bank accounts, where they cash corporate checks for their own personal benefit while the corporation is delinquent in paying its debts, where they fail to hold board of directors meetings, where they hold business licenses in their own name rather than in the corporation’s, and where they inject only a few thousand dollars into a multimillion dollar corporation.
Individuals that maintain multiple corporations should also be aware that one corporation can be the alter ego of another corporation, such as where they fail to keep separate corporate books and accounts, fail to hold separate meetings or maintain separate headquarters, fail to separate business operations and responsibilities, or freely transfer assets from one corporation to the other.
Rod Woodbury can be reached at 933-0777.
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