Normally, as an owner or shareholder of a corporation, LLC, or partnership, you are not personally liable for the actions for the entity. The corporation “veils” the actions of its investors and principals, allowing them to make business decisions while not being afraid that they will be affected personally. But under certain circumstances, it is possible for a creditor or a person seeking reimbursement from the corporation to pierce the shell of the corporation and sue the investors or owners of the corporation personally (or if the investor is a business, the assets of the business).
Generally, the corporate veil will be pierced by the court when the corporation is perpetuating a fraud, accomplishing a crime, or evading the law. State, Dep’t of Envtl. Prot. v. Ventron Corp., 94 N.J. 473, 500 (1983) (citing Trachman v. Trugman, 117 N.J.Eq. 167, 170, (Ch.1934)). Courts will typically look for whether this shell corporation “had no separate existence [and] was merely a conduit for the parent” before determining whether this corporation was used for criminal or fraudulent purposes. Id. at 501.
Some examples of situations that the court would look for include “whether the subsidiary was grossly undercapitalized, the day-to-day involvement of the parent’s directors, officers and personnel, and whether the subsidiary fails to observe corporate formalities, pays no dividends, is insolvent, lacks corporate records, or is merely a facade.” Verni ex rel. Burstein v. Harry M. Stevens, Inc., 387 N.J. Super. 160, 199–200 (App. Div. 2006). A corporation is considered undercapitalized when its “capitalization is very small in relation to the nature of the business of the corporation and the risks … attendant to such businesses.” Canter v. Lakewood of Voorhees, 420 N.J. Super. 508, 520 (App. Div. 2011) (citing Verni, 387 N.J. Super. at 200). If the corporation or LLC acts as a “pass-through” that funnels any income it receives directly to its owners or shareholders, a court would likely pierce the veil of that company. Conversely, a company funded by its investors that functions with its own income would likely not be pierced, as it is not just a façade for its owners to escape liability.
If you are looking for additional details on this topic or if you require advice about your situation, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at fniemann@hnlawfirm.com. Please ask us about our video conferencing or telephone consultations if you are unable to come to our office.
Written by Stephen W. Kornas, Esq. of Hanlon Niemann & Wright