Piercing the Coporate Veil: Legal Exposure for Business Owners
In this economic environment in which companies are struggling, and sometimes failing, we’re finding that creditors (including judgment creditors) are more regularly attempting to “pierce the corporate veil” and hold the individual shareholders/members and officers of a closely-held company liable for a judgment against the company.
The Georgia Court of Appeals has stated that the “legal principle that each corporation is a separate entity, distinct and apart from its stockholders, and insulation from liability is an inherent purpose of incorporation.” Clark v. Cauthen, 239 Ga. App. 226, 227(2), 520 S.E.2d 477 (1999). “[G]reat caution should be exercised before disregarding this separateness.” Garrett v. Women’s Health Care of Gwinnett, 243 Ga. App. 53, 55-56(2), 532 S.E.2d 164 (2000). “The concept of piercing the corporate veil is applied in Georgia to remedy injustices which arise where a party has over extended his privilege in the use of a corporate entity in order to defeat justice, perpetuate fraud or to evade contractual or tort responsibility.” Baillie Lumber Co. v. Thompson, 279 Ga. 288, 289-290, 612 S.E.2d 296 (2005). To pierce the corporate veil, it is necessary to show that the shareholders disregarded the corporate entity and made it a mere instrumentality for the transaction of their own affairs; that there is such unity of interest and ownership that the separate personalities of the corporation and the owners no longer exist. Baillie Lumber Co., supra, 279 Ga. at 289-290, 612 S.E.2d 296. “Sole ownership of a corporation by one person or another corporation is not a factor, and neither is the fact that the sole owner uses and controls it to promote his ends. There must be evidence of abuse of the corporate form.” Clark, supra, 239 Ga. App. at 227(2), 520 S.E.2d 477. Evidence of such abuse can be shown by a “commingling on an interchangeable or joint basis or confusing the otherwise separate properties, records or control.” See J-Mart Jewelry Outlets v. Standard Design, 218 Ga. App. 459, 460(1), 462 S.E.2d 406 (1995).
It is important that business owners are careful “to observe the corporate form” in the operation of the company. Please contact us to assist you with reducing your exposure to legal claims against your business.