Piercing the Corporate Veil

Piercing the Corporate Veil

By: Martin M. Shenkman, CPA, MBA, JD

Almost every business is organized as a corporation or LLC to prevent lawsuits from reaching your personal assets. If the business gets sued, all assets of the business might be at risk, but your household assets should not be. However, the courts have pierced the corporation's protection and have allowed claimants to get personal assets, in some cases even giving away a house. This is called "piercing the corporate veil".

In a recent case, a group of New York doctors got quite closing to tasting this bitter pill. Although they escaped by the skin of their teeth, the case teaches valuable lessons. Since litigators are looking at this case for guidance on how to pierce through corporations in future cases, you should look at this case for how to shore up yours. Cherkasets v. Gordon, 21 AD3d 856 (1st Dept. 2005). These lessons apply to more than doctors, and the concepts should apply to other states and LLCs as well.

Look at the following example: You and your partners have a medical practice corporation and surgical center LLC. Take the following tips into consideration, to avoid having your personal assets taken away from you in a case of malpractice.

  • Observe all corporate formalities: signing in corporate name, issue stock, hold annual meetings, etc.
  • Be sure your corporation is adequately capitalized. If you have multiple corporations do not let them share each other's assets as if they were their own.
  • Do not let the medical corporation pay for expenses of the surgical center.
  • Do not have surgical center equipment find its way into your medical practice office without a lease.
  • Minimize overlap of ownership, officers and directors. For instance, common office space and addresses should be minimized. This is probably impossible for many family businesses, or real estate developers owning many properties.
  • Keep transactions between your different entities arm's length (what you would pay a stranger). Do not let one entity guarantee or pay another entity's debts. Each entity should stand independently as a profit center.
  • Never use funds for personal purposes.
  • Do not commingle personal or other entity funds.

By following all of these rules, you should be able to protect your assets.

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