One of the greatest advantages of organizing a business as a corporation, along with certain other types of business entities, is that it shields the business’ owners from liability for business debts and other obligations. Corporations and other business entities exist separately from their owners as distinct legal entities. Creditors and other claimants can only recover from the business entity, except in certain rather extreme situations. A court rarely may “pierce the corporate veil” by allowing someone to assert a claim against, or collect a business debt from, the owners of a business. New York and New Jersey have similar rules regarding when a court may do this.
Types of Business Entities
Not all business entities protect owners from liability. An individual who operates a business with no formal legal structure is known as a sole proprietor. Two or more people operating a business in this manner are considered to be in a general partnership with each other. In both cases, the owners of the business may be held personally liable for business debts.
Organizing a business as a corporation requires filing paperwork with the state. Owners of a corporation are known as shareholders. Provided that they abide by the requirements set out by state law and by the business’ own bylaws, shareholders are shielded from liability.
Reasons for Piercing the Corporate Veil
Piercing the corporate veil may occur in the context of a lawsuit seeking to collect a business debt, enforce a contract, or hold a company liable for a business tort or personal injury. It also may occur after a business is dissolved in bankruptcy, and creditors try to pursue individual shareholders to recover debts that could not be paid out of the bankruptcy estate. State or federal regulators may seek to hold shareholders, directors, or executives personally liable for alleged unlawful activities by the business. If the shareholders deny liability in their individual capacities, the court must decide whether or not they may be named as defendants.
Piercing the Corporate Veil in New York
The New York Court of Appeals has established a high barrier to piercing the corporate veil. While courts must assess each case in light of its own unique circumstances, there are two key factors in making this determination in regard to the shareholders or owners: (1) “complete domination of the corporation in respect to the transaction attacked,” (2) which “was used to commit a fraud or wrong against the plaintiff which resulted in plaintiff’s injury.” Morris v. Dept. of Taxation, 82 N.Y.2d 135, 141 (1993).
Piercing the Corporate Veil in New Jersey
New Jersey’s standard for piercing the corporate veil, as established by the New Jersey Supreme Court, is less stringent, but it still requires a claimant to establish numerous specific facts. A court may pierce the corporate veil in New Jersey “in cases of fraud, injustice, or the like,” or if it “find[s] that a subsidiary was a mere instrumentality of the parent corporation.” State, Dept. of Environ. Protect. v. Ventron Corp., 94 N.J. 473, 500 (1983).
Business transactions attorney Samuel C. Berger represents businesses, business owners, and entrepreneurs in New York City and Northern New Jersey. We offer fixed-fee legal-service packages that cover a wide range of legal matters to meet our clients’ needs. Contact us online, at (201) 587-1500, or at (212) 380-8117 today to schedule a confidential consultation with a knowledgeable and skilled business advocate.
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