Limited Liability Companies and corporations typically protect owners from personal liability from a company’s debts and lawsuits — this protection is called the “corporate veil.” Exceptions to this protection exist when fraud, commingling, and other wrongful acts are committed by the owners. In such cases, courts let the corporate veil be pierced in order for creditors’ claims to be satisfied. Reverse piercing of the corporate veil is another exception that can come into play when there has been serious wrongdoing.
What is Reverse Piercing of the Corporate Veil?
While the corporate form should provide a separate legal existence between the individuals who own the company and the company itself, the law does not favor any disregard of it. Reverse veil piercing is essentially the opposite of corporate veil piercing. Where corporate veil piercing allows the personal assets of an owner to be seized to satisfy the corporation’s debts, reverse veil piercing involves attaching the judgment liability of a corporation’s owners to the business entity.
Reverse corporate veil piercing is as complicated as veil piercing. The tactic is usually invoked when an owner of a corporation or Limited Liability Company does not have other assets sufficient to satisfy a judgment — or those assets are harder to reach.
To obtain the right to receive distributions of an Limited Liability Company or corporation, the tool used by many creditors who have obtained a judgment against an individual owner is called a charging lien. While this charging lien does not pierce the corporate veil and allow the creditor to take assets, the lien provides a mechanism for the creditor to obtain relief. This lien gives a creditor the right to receive financial benefits that would otherwise go to the owner. In reverse veil piercing, the creditor may go beyond the lien on the owner’s interest and seek to hold the company directly liable for the debts.
When is Reverse Piercing of the Corporate Veil Permitted?
Courts analyze similar factors when determining whether veil piercing or reverse veil piercing is appropriate. Although the facts of every matter are different, reverse veil piercing can occur where the owner is simply using the corporation as a vehicle for their own personal affairs. Reverse piercing can also arise when the corporation is under the complete control and domination of the owners.
A common example of reverse piercing of the corporate veil concerns taxes. For example, if the Internal Revenue Service has a tax debt against a taxpayer, the Service may try to reverse pierce the taxpayer’s assets in the corporation to satisfy the lien.
The best way to avoid reverse or traditional corporate veil piercing is to:
- Avoid using the corporate formation to circumvent any personal obligations
- Do not carry out any wrongdoing using the corporate formation
- Maintain all corporate formalities
- Avoid commingling of assets
- Ensure adequate business capitalization
- Obtain enough liability protection
Good practices in place can help ensure your personal assets and business are protected. It’s best to regularly consult with an experienced business attorney who can best advise regarding compliance with corporate laws, help you to identify and mitigate potential risks, and ensure adherence to corporate governance policies.
Contact an Experienced New York Business Attorney
Matters involving reverse or traditional corporate veil piercing are complex. It’s crucial to have a skillful business attorney who can help you navigate the legal process and ensure the best possible outcome. Offering reliable representation and high-quality legal services, Brinen & Associates advises business clients regarding a wide variety of business matters, including those involving corporate liability. Call (212) 330-8151 or send us a message to learn more about how we can assist you.