Protecting Personal Assets from Corporate Liability
A well-known primary advantage to incorporating a business is the limited liability the corporation provides its shareholders. Typically, a corporation's shareholders, directors, and officers are not liable for the corporation's debts and liabilities. This legal protection is sometimes called the "corporate veil." However, business owners need to be aware that in certain circumstances the corporate structure can be disregarded and the shareholders held personally responsible. This is known as "piercing the corporate veil."
In Montana, a two-part test is used to determine whether one can pierce the corporate veil. First, a judge will look to whether the corporation is a mere "alter ego" of the shareholder. A corporation must behave as the distinct legal entity it was meant to be, so if the shareholders treat the corporation as an alter ego for their own dealings, the corporate veil may be pierced. The second part of the test is whether the corporation is being used as a "subterfuge" to perpetrate fraud or some other injustice. In other words, there must be some element of unfairness or wrongdoing.
Several factors indicate whether a corporation is an alter ego, such as whether a shareholder owns most of the corporation's stock, whether he is a director or president of the corporation, and whether he makes corporate decisions without consulting other directors or officers. The lack of corporate records is another factor, so corporate formalities should be observed, such as holding annual director and shareholder meetings and keeping accurate minutes of those meetings.
The court looks to whether the corporation remains a separate entity, so the corporation should maintain separate corporate accounts and the shareholders should avoid commingling their assets with the corporation's assets. When dealing with third parties, shareholders should make it clear they are acting on behalf of the corporation rather than themselves.
A court will also consider whether the corporation is undercapitalized or if it was set up to never make a profit. Thus, the corporation should avoid taking on debt when the company is already insolvent.
There are other factors that may lead a court to impose personal liability on shareholders. At the Moulton Firm, we have many attorneys who are experienced in corporate law and can assist in taking the necessary steps to prevent piercing the corporate veil.
