One of the principle reasons that Washington State business owners form corporations or limited liability companies is to shield themselves personally from the liabilities of the business itself. If the corporation is properly formed and properly operated, the corporation’s debts and other liabilities belong to it – not to the shareholders.
As with a number of legal matters, however, the devil is in the details. That is to say, if the corporation either is improperly formed or its operation is too shabby, Washington State courts may disregard the corporate structure altogether. In such cases, each of the shareholders can face unlimited liability. In legal circles, this is referred to as “piercing the corporate veil.” Under what circumstances will courts ignore a corporation’s separate existence?
Shredding/Piercing the Veil
Although the following is not an exhaustive list, a Washington State court will sometimes “shred” the corporate veil where:
- The corporation or its management has engaged in fraudulent activities. Limited liability is supposed to favor those who operate legitimate business and who do so in legitimate fashion. The law of corporations cannot be used to hide the existence of, or shield the perpetrators of fraud.
- There is no legitimate separation between the corporation and its owners. The important thing to remember here is that the veil can be pierced even when the business has done no wrong if, after forming the corporation, the owners merely continue on as if there was no separate entity. Important questions to keep in mind include:
- Is the corporation a sham?
- Do the owners pay personal debts out of corporate funds or other corporate assets?
- Does corporate “management” make business decisions without appropriately recording them in the corporate records?
- If the owners have ignored the sort of “separateness” that is required of true corporate activity, the courts will have little trouble ignoring it as well.
Problems Often Arise With Do-it-Yourself Incorporations
All too often, business owners make a very expensive decision: They decide to download a few corporate documents and file them with the appropriate Washington State offices. They forget that it isn’t the responsibility of state officials to point out errors or inconsistencies in the documentation. The State of Washington, after all, doesn’t practice law; it enforces the law.
Armed with their crisp, new corporate documents, the new business owners pat themselves on the back for having saved some money – they don’t know how much or how little they saved, since they assumed that an attorney’s assistance would be expensive when, often, it isn’t. They file their documents in a file cabinet and begin to operate the business, never again giving the corporate structure any real thought.
Something goes wrong; the business owners get sued. They desire to stand behind the corporate barrier of limited liability, but the court rules against them and, because they have never actually operated as a corporation, they find themselves personally liable for the debts of the business. But hey, they saved some money at the very beginning!
Experienced Legal Counsel Can Make All the Difference
Blado Kiger Bolan, P.S. has over 50 years of combined experience providing businesses with quality services throughout the Pacific Northwest. Whether it’s the incorporation of a new business or providing representation to an existing business, we routinely supply businesses and shareholders alike with counsel regarding all sorts of legal matters related to business operation. If circumstances are such that you need to pierce the veil of another corporate business, we can provide guidance there as well, apprising you of what legal options you might have. For assistance with an employment agreement, or any other type of business issue, contact us on the web, or call either our Tacoma office or our Puyallup office at 253–272–2997.