Piercing the Protective Corporate Veil Part 2: Factors 4-6

The last post briefly analyzed the first three of eleven factors that courts rely upon when determining whether an entity is merely an alter-ego of another entity or individual.  in this post, we will explore the next three factors:

4) Absence of company records

Courts will often look at whether the corporation or other limited liability entity maintains proper company records.  For instance, the absence of proper corporate tax returns, corporate bank accounts or written contracts which may be deemed to be necessary in order to transact business as a separate entity can be an important factor in a court’s decision to pierce the corporate veil.

5) nonpayment of dividends

Although not the most important factor if countervailing facts exist, courts may still pierce the corporate veil if dividends are not paid.

6) Insolvency of debtor company

When a plaintiff in a lawsuit attempts to sue an individual for a business’ debts, courts generally presume that if the business were solvent, it would pay its debts and that the plaintiff in a lawsuit would sue the business, not an individual.  Therefore, it follows that this factor is often construed in favor of piercing liability protection.

This post is not intended to be legal or tax advice.  Formeller & Formeller LLP’s Chicago startup attorneys have helped numerous clients form their businesses.  Our skilled Chicago business lawyers can help counsel you on avoiding personal liability for your corporation or other limited liability entity’s actions.  Please contact our law firm today for a free legal consultation if you would like to discuss a new business venture or business ownership.