Many people are familiar with the basic liability protections afforded to the owners of a business entity such as a Florida LLC, corporation, or limited partnership. These legal structures allow for the protection of their owners from personal liability in the event of a successful lawsuit against the company. However, what may not be as well-understood is the fact that this protection is not absolute. Courts can and will ignore the corporate liability shield if the circumstances call for such treatment. This legal doctrine is known as “piercing the corporate veil.”
If challenged in a lawsuit, IRS audit or other legal action, the corporate “veil” of liability protection may be disregarded and the shareholders, members, or partners may be held personally responsible for the debts or liabilities of the company. This often happens when the evidence shows that the business did not follow proper corporate formalities, when owners commingle business funds with personal funds, or where the owners failed to adequately capitalize the business. When a piercing action is successful, the injured party may successfully seek to hold the individual owners personally responsible if there are not enough assets in the company to satisfy their judgment.
Piercing actions have a relatively alarming rate of success, especially when business owners do not consult with an experienced business attorney who can help them to understand the risks. Oftentimes these individuals think that merely establishing the company will protect them. Unfortunately, this is not always the case. At a minimum, business owners should be following the corporate formalities required of them under Florida law. These formalities can differ depending on the entity, the business, and the individual circumstances, which is why it is so important to discuss the proper establishment and maintenance of a Florida business entity with a Florida business attorney before an issues arises. Once a grievance, lawsuit, or levy has been filed, it is often too late to make any changes that will be effective against an action to pierce the corporate veil.