In New York (and other states), courts have held that a corporation or other non-personal business entity can be “pierced” allowing a plaintiff to go after the corporation owner’s personal assets. This is referred to as “piercing the corporate veil.”
An analysis of your corporations, limited liability companies and other business entities is important to see if you are at risk for having the protections of your corporation set aside in a lawsuit, exposing your personal assets. Typically, courts have considered this remedy for a creditor/plaintiff in cases where they find the corporation to be an “alter ego” of the owner(s).
Courts will typically analyze the following:
- Was the corporate format respected? (i.e. meetings, voting, director actions and elections, etc.)
- Is there a clear distinction between the owner’s assets and the corporation?
- How were tax returns filed?
- How were bank accounts held?
In general, it should be difficult to pierce the corporate veil. However, since many business owners do not even document basic corporate actions, doubt can be raised in a lawsuit if the corporation is, in fact, being operated as a separate entity.
One of the most effective yet simple ways to protect against an attempt to go after personal assets by piercing the corporate veil is to have sufficiently detailed annual corporate minutes and for any major corporate decisions. This can significantly cut down on the ability of someone to go after personal assets in a lawsuit against the corporation (or other business entity). It will also reduce the amount of time your lawyer has to devote to defending any such claims, if not cut off the validity of any such claim entirely (which would save you from the legal fees necessary to defend such an additional claim).