September 7, 2012

Am I Responsible For My New York Business' Debts: Piercing the Corporate Veil

1191957_grey_emblem.jpg"Piercing the Corporate Veil" is a term that may sound strange, archaic, or even intimidating; but when you dig through the lawyer-speak, it is really a simple concept. Piercing the corporate veil basically means that the owner of a corporation will be personally liable for the debts or obligations of the corporation. That is a concept with which every New York business owner should be familiar.

When people want to start a business in New York, they often form a corporation or other legal entity, such as a Limited Liability Company, to operate the business. They often will not do business under their own name, but, instead, under the corporation's name. Most people know the reason for this is to limit the owners' liability for the acts and debts of the corporation. In New York, as in most jurisdictions, a corporation is a separate legal entity that exists independently of its owners, the owners normally are not liable for the corporation's debts, and a business owner can form a corporation for the very reason that she wants to limit her liability for the corporation's debts. See Morris v. New York State Dept. of Taxation & Fin., 82 N.Y.2d 135, 140-41, 623 N.E.2d 1157, 1160 (1993); and E. Hampton Union Free Sch. Dist. v. Sandpebble Builders, Inc., 66 A.D.3d 122, 126, 884 N.Y.S.2d 94, 98 (2nd Dept. 2009) aff'd, 16 N.Y.3d 775, 944 N.E.2d 1135 (2nd Dept. 2011).

Most business owners form a corporation because they do not want to put their personal assets at risk if they do not have to. If the corporation they own incurs a bill, they intend to pay it, that is how they stay in business; but if the corporation goes out of business or does not have the money to pay the bill, they do not want to have to pay it out of their own pockets. Every New York business owner should remember, however, that this shield against personal liability is not bulletproof. There are ways to hold an owner personally liable for the corporation's debts; i.e., to pierce the corporate veil.

It is not easy, or common, to hold the owner of a corporation personally liable for the corporation's debts. Many times the party that tries to do it, i.e., the Plaintiff in the court case, is a vendor, supplier, or landlord , who cannot collect a legitimate debt from the corporation. Many times they have continued to supply the corporation, even when payments have fallen behind, because the owner has promised to make good on the debts if only they would wait a little longer. In order to pierce the corporate veil, the Plaintiff must show that the owner of the corporation exercised complete domination of the corporation in the transaction the Plaintiff has complained about; that the owner's domination was used to commit a fraud or wrong against the Plaintiff which resulted in the Plaintiff's injury; and that the owner, through her domination, abused the privilege of doing business in the corporate form to perpetrate the wrong against the Plaintiff. See Morris v. New York State Dept. of Taxation & Fin., 82 N.Y.2d 135, 141-42, 623 N.E.2d 1157, 1160-61 (1993); E. Hampton Union Free Sch. Dist. v. Sandpebble Builders, Inc., 66 A.D.3d 122, 126, 884 N.Y.S.2d 94, 98 (2nd Dept. 2009) aff'd, 16 N.Y.3d 775, 944 N.E.2d 1135 (2nd Dept. 2011); Love v. Rebecca Dev., Inc., 56 A.D.3d 733, 868 N.Y.S.2d 125 (2nd Dept. 2008).

There are myriad examples of what does, and what does not, meet the test for piercing the corporate veil; it is an extremely fact specific inquiry. It is important to remember, however, that merely showing that an owner dominated a corporation in a particular transaction is not enough to hold the owner personally liable for the corporation's debts. If that was the case, then just about every corporation which is principally owned by an individual who actively helps run the business, would have to defend against attempts to get her to pay for the corporation's debts. That would render the protections inherent in forming a corporation, of little or no use to most businesses. Thankfully, in New York, that is not the case.