In U.S. business law, incorporation is universally recognized as one of the most valuable – if not the most valuable – tools for individual protection and protection of personal assets. This is because it establishes a legal separation between individuals and their businesses, thereby creating a “corporate veil” that eliminates personal liability if someone sues the business.
Contrary to popular belief, however, incorporation does not provide absolute protection. In fact, there are several circumstances in which these protections may be legally disregarded altogether. The process in which this happens is called “piercing the corporate veil.” Here’s what you should know about this process in Florida.
Florida law mandates that someone who wants to pursue this option must prove that: 1) the shareholder(s) and/or parent corporation haven’t maintained a clear legal separation between themselves and the corporation in question; and 2) that the shareholder(s) or parent corporation participated in unlawful or illicit activities.
Specifically, courts have determined that the corporate veil may be pierced if there is concrete proof that the corporation engaged in “fraud, wrongdoing, or injustice,” affecting the claimant. This type of activity could include, for example, the termination of one company and the transfer of its assets to another company held by the same corporation to avoid the payment of business debts.
Florida courts have also allowed the corporate veil to be pierced if there is no obvious differentiation between companies (such as subsidiaries or affiliates) operated by a parent corporation. This typically occurs if there’s evidence that the companies share the same bank accounts, have the same corporate officers, the same corporate address, and so on.
On a related note, the corporate protections may be negated if there is ample evidence that there is no clear differentiation between the company and its owners or shareholders. A simple way to prove this would be to show the ongoing use of personal bank accounts in the context of the business.
Another significant factor that Florida courts consider in making determinations about the corporate veil is whether the company in question had its own bank account and enough money to support its operations from the beginning. In this context, the court will also assess whether the assets available to creditors is reasonable given the purpose of the company.
Failure to follow corporate protocol may also result in the loss of personal protection afforded by incorporation. This means owners, officers, and shareholders should be aware of and abide by certain rules when acting in official capacities.
In all, there are at least fifteen (15) elements that courts may consider when determining whether to pierce the corporate veil. Because it’s impossible to discuss all fifteen in this article, it’s important that you consult with an experienced business attorney first. If you are thinking about forming a corporation or LLC in Florida, and you want to learn more about how to shield yourself or your assets from a potential lawsuit, an experienced business attorney can help.
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