One of the most important purposes of incorporating or creating a Limited Liability Company is obtaining the benefit of limited liability. Losses are limited to the assets belonging to the corporation or LLC. Personal assets are protected.
This benefit can be lost. The corporate veil can be pierced and the shareholders can have personal liability where two requirements are met. First, the corporation is determined to be the alter ego of one or more individuals. Second, the observance of the corporate form would sanction a fraud or promote injustice. Arizona Courts have defined “alter ego” as a situation where there is such a unity of interest that there is no separation between the corporation and the person controlling its actions. This can be found where a shareholder runs the corporation in such a manner that there is a confusion of identities between the corporation and other business activities of the shareholder. Alter ego will also be found where a shareholder misuses the corporate existence to his or her own advantage and treats corporation property as his or her own property as if no corporate identity existed.
Some of the circumstances that may result in personal liability for shareholders can be:
- Commingling corporate funds with personal funds;
- Personal use of corporate assets;
- Transferring assets in and out of the corporation as the need for cash arises in other areas of the shareholder’s personal affairs;
- Payment of personal expenses with corporate funds;
- Lack of proper record keeping including a lack of minutes of annual and special meetings of the shareholders and directors; lack of a record of corporate resolutions.
The lesson to be learned here is that the integrity of a business entity such as a corporation must be respected by its owners if they hope to preserve the benefit of limited liability. A lack of formality, a lack of discipline and poor or negligent record keeping can lead to personal liability.
These and other circumstances are what creditors of a business will be looking for to shift liability from the corporation to its owners and make collection more certain. Business owners must be aware of this and make good business practices a part of their routines.
In Phoenix, creditors are sophisticated and aggressive in pursuing their claims. Any questionable circumstance could give a creditor an opening to attempt to persuade a court to disregard the corporate entity and assess personal liability.
If you have any questions or concerns don’t hesitate to contact one of our experienced Attorneys. Platt & Westby, P.C. 602.277.4441.