Incorporating a business or forming a limited liability company (LLC) are both very smart decisions for business owners. While each one has its own individual benefits, both allow a business owner to protect his or her personal assets in case someone sues their business. However, sometimes individuals or businesses will form a corporation or LLC to shield themselves from liability, but utilize them for improper purposes. In such cases, a victim who is wronged by such conduct may have limited recourse, as they could attempt to sue a business that is merely a shell with little to no financial assets to recover. It is for this reason that courts allow these victims to “pierce the corporate veil,” essentially disregarding the corporate entity and allowing recovery directly from either the parent company or the individual(s) who formed the corporation or LLC.
XL Vision, LLC. v. Holloway, 856 So. 2d 1063 (Fla. 5th DCA 2003) states that under Florida law, a court may pierce the corporate veil if a person proves both that the corporation is a “mere instrumentality” or alter ego of the wrongdoer, and that the wrongdoer engaged in “improper conduct” in the formation or use of the corporation.” Hilton Oil Transp. v. Oil Transp. Co., S.A., 659 So. 2d 1141, 1151-52 (Fla. 3d DCA 1995) provides a list of factors courts deem relevant in determining whether a corporation or LLC is a “mere instrumentality” or “alter ego”, stating:
There are at least fifteen factors that have been deemed to be relevant in a determination of whether a corporate entity should be disregarded: (1) the absence of the formalities and paraphernalia that are part and parcel of the corporate existence, i.e. issuance of stock, election of directors, keeping of corporate records and the like; (2) inadequate capitalization; (3) whether funds are put in and taken out of the corporation for personal rather than corporate purposes; (4) overlap in ownership, officers, directors, and personnel; (5) common office space, address and telephone numbers of corporate entities; (6) the amount of business discretion displayed by the allegedly dominated corporation; (7) whether the related corporations deal with the dominated corporation at arm’s length; (8) whether the corporations are treated as independent profit centers; (9) the payment or guarantee of debts of the dominated corporations by other corporations in the group; (10) whether the corporation in question has been properly used by others of the corporations as if it were their own; (11) financing of subsidiary by parent; (12) informal intercorporate loan transactions; (13) parent and subsidiary’s filing of consolidated income tax returns; (14) whether subsidiary’s directors act independently in interest of subsidiary rather than in interest of parent; (15) existence of fraud, wrongdoing or injustice to third parties.
Although there is no specific definition for the type of “improper conduct” a person must prove to pierce the corporate veil, Steinhardt v. Banks, 511 So. 2d 336 (Fla. 4th DCA 1987), provides a good summary of the circumstances under which a court should do so. The appellate court explained in pertinent part:
Florida decisions uniformly hold that courts will look through the screen of corporate entity to the individuals who compose it in cases in which the corporation was a mere device or sham to accomplish some ulterior purpose, or is a mere instrumentality or agent of another corporation or individual owning all or most of its stock, or where the purpose is to evade some statute or to accomplish some fraud or illegal purpose, or where the corporation was employed by the stockholders for fraudulent or misleading purposes, was organized or used to mislead creditors or to perpetuate a fraud upon them, or to evade existing personal liability.
While the factors and circumstances provided by Hilton Oil and Steinhardt are not exclusive, they are good resources for people or businesses involved in lawsuits requiring a court to pierce the corporate veil.
The Mavrick Law Firm has successfully represented many businesses in Florida business litigation cases throughout the Miami-Dade, Broward, and Palm Beach County areas encompassed by the Third and Fourth District Courts of Appeal, as well as Hillsborough, Sarasota, and other counties encompassed by the Second Circuit Court of Appeals. This article is not a substitute for legal advice tailored to a particular situation. Peter T. Mavrick can be reached at: Website: www.mavricklaw.com; Telephone: 954-564-2246; Address: 1620 West Oakland Park Boulevard, Suite 300, Fort Lauderdale, Florida 33311.