Piercing the Corporate Veil

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 house shouldn’t. However, the
courts have pierced the corporation’s protection and let claimants get personal
assets, like your house, in some situations. This is called “piercing the
corporate veil”. In a recent case, a group of NY doctors got quite closing
to tasting this bitter pill. Although they escaped by the skin of their teeth,
the case teaches some valuable lessons. Since litigators are looking at this
case for guidance in 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. Be sure your
corporation is adequately capitalized. If you have multiple corporations don’t
let them share each other’s assets as if they were their own. Example, you and
your partners have a medical practice corporation and surgical-center LLC.
Don’t let the medical corporation pay for expenses of the surgical-center.
Don’t have surgical-center equipment find its way into your medical practice
office without a lease. Minimize overlap of ownership, officers and directors.
This is probably impossible for many family businesses, or real estate
developers owning many properties. Common office space and addresses should be
minimized. Again, a difficult or impossible task for many. Observe all
corporate formalities: signing in corporate name, issue stock, hold annual
meetings, etc. Keep transactions between your different entities arm’s length
(what you would pay a stranger). Don’t 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. Don’t commingle personal or other entity
funds.