Be Formal With Your Business: Avoiding Corporate Veil Piercing (Part 2)

Some of the factors courts will look to in determining whether a businesses liability veil should be pierced and a business level liability should become an owner's liability include:

1. Inadequate capitalization- The business should have enough capital available to pay its reasonably foreseeable debts.

2. Not complying with corporate formalities- The business should comply with all record keeping requirements imposed by statute and document its acts as a separate legal entity from its owner or owners.

3. Complete domination and control over the business by an owner so that the business has no separate identity- The business should never comingle its funds with the funds of an individual owner and should have appropriate safeguards in place to avoid the situation of complete domination by an owner.  An LLC or corporation should have appropriate documentation in writing governing its operations to prevent this factor as well.  This includes a sufficient operating agreement for an LLC and bylaws and (potentially) a shareholder's agreement for a corporation.

This list is not exhaustive but does provide some basic ideas of how business owners might avoid a situation where a business liability becomes an owner's liability.