3275 South Jones Blvd., Suite 105
Las Vegas, NV 89146
(702) 307-9500

PIERCING THE CORPORATE VEIL
09/05/2012

Nevada has long recognized that although corporations and LLCs are generally to be treated as separate legal entities, the remedy of "piercing the corporate veil" may be available to a plaintiff in circumstances where it appears that the corporation or LLC is acting as the alter ego of a controlling individual.  Third parties have to show personal wrongful conduct on the part of a company official or director to hold them personally responsible; extra-corporate actions which would support application of the legal doctrine known as "piercing the corporate veil."

Some of the elements for finding an alter ego are:

  1. The company must be influenced and governed by the person asserted to be the alter ego;
  2. There must be such unity of interest and ownership that one is inseparable from the other; and
  3. The facts must be such that adherence to the corporate fiction of a separate entity would, under the circumstances, sanction a fraud or promote injustice.

Further, the following factors, though not conclusive, may indicate the existence of an alter ego relationship allowing for one to "pierce the corporate veil" and go after a member of a company personally for the debts and/or liability of that company:

  1. There is a general commingling of corporate activity and/or funds and those of the person or persons who control the company.
  2. Undercapitalization (i.e., members removing unreasonable amounts of funds from the company, endangering its financial stability).
  3. Unauthorized diversion of funds.
  4. Treatment of corporate assets as the individual's own.
  5. Failure to observe corporate formalities.
  6. Corporate debt is knowingly incurred when the company is already insolvent.
  7. Required annual meetings are not held.
  8. Corporate records, especially minutes of member meetings, are not properly or adequately maintained.
  9. There is a pattern of consistent non-payment of dividends, or payment of excessive dividends.
  10. There is a failure to maintain separate offices, the company has little or no other business and is only a facade for the activities of the dominant shareholder who is in fact, the corporate "alter ego."

However, the Nevada Supreme Court has emphasized that there is no litmus test for determining when the corporate fiction should be disregarded; the result depends on the circumstances of each case.  Nevertheless, in order to maintain personal limited liability, it is essential these described actions be avoided.  As such, certain steps may be made to avoid a "piercing of the corporate veil."  These are, but are not limited to, the following:

  1. Have annual meetings regularly scheduled and conducted.
  2. Have corporate minutes of each meeting accurately recorded.
  3. Have the corporate minutes of previous meetings reviewed at subsequent meetings.
  4. Always identify your corporate title when signing any document.
  5. Keep records of all business transactions, and keep them separate from all other business's transactions you may have.
  6. File an annual corporate tax return.
  7. Limit the issuance of personal guarantees, written or otherwise.
  8. Do not commingle corporate funds with your personal funds. Have separate corporate bank accounts apart from your personal accounts.
  9. Document all capital contributions made and distributions paid out.
  10. Attempt to create a pattern of consistent payment of dividends.
  11. Do not treat corporate assets as your own. (i.e., do not pay your home's power bill, groceries, etc. with a company check or credit card. Also, do not pay corporate bills with a personal check either.)
  12. Do not incur corporate debt when the company is already insolvent.
  13. Maintain separate offices for each company you own.
    • Have separate phone lines installed with different phone and fax numbers for each company.
    • Use different stationary, invoices, etc. for each company, and never mix the two.
    • Keep separate computer files and hard files for each company.
    • Issue separate payroll.

In the end, everyone operating a business should think about forming a separate legal entity to conduct their business.  The attorneys at our firm can consult with you to provide the legal advice, guidance and expertise necessary to assist you with forming the right legal entity to suit your needs, and help you avoid the legal trappings discussed above. 

For more information contact us at office@fdlawlv.com.

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