The single most important reason why individuals form corporations or LLC’s is to shield themselves from individual liability. The usual risk to the individual is limited to his/her monetary/non-monetary investment in the business.
If the veil of a corporation or LLC is pierced, the debts of the entity are also treated as debts of the shareholder or member.
The good news in Pennsylvania is that case law clearly establishes a strong presumption against piercing the veil of a corporation or LLC. Any individual contemplating forming a business entity or any existing business owner should know the factors a court would consider in ruling on an attempt by a creditor to proceed under this theory:
- Insufficient Capitalization for the purposes for which the entity was undertaken;
- Co-mingling of personal funds with business funds;
- Failure to observe business formalities such as conducting meetings, keeping minutes, electing directors, and keeping bank records;
- Use of the business entity to perpetrate a fraud; and
- Creation of a new business entity to avoid debts of a pre-existing business entity.
While there is strong presumption against piercing the business entity veil, avoiding the above pitfalls can help to insure that you maintain the limited liability for which you formed your business entity.
Please don’t hesitate to contact Ronald S. McGlaughlin if you have any questions pertaining to the topics raised in this post.
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