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Whether you own an interest in a corporation, limited liability company, subchapter-S corporation, or any other closely-held business, you have to remember that it is a separate and distinct entity from you as an individual. The liability shield that you receive by conducting business through that entity can be swiftly bypassed if the entity does not follow the appropriate business formalities in maintaining its existence separate and apart from its members/shareholders.
The legal doctrine known as “piercing the corporate veil” is a means by which creditors can disregard the corporate entity and assess liability against the members/shareholders directly. In order to prevail on such a claim under Indiana law, courts considers evidence of:
(1) undercapitalization; (2) absence of corporate records; (3) fraudulent representation by the corporation's shareholders or directors; (4) use of the corporation to promote fraud, injustice, or illegal activities; (5) payment by the corporation of individual obligations; (6) commingling of assets or affairs; (7) failure to observe required formalities; or (8) other shareholder acts or conduct ignoring, controlling or manipulating the corporate form.
Freeland v. Enodis Corp., 540 F.3d 721 (7th Cir. 2008). In other words, these are the kinds of facts that courts look to determine whether an entity truly is separate and distinct from its members or whether it is a mere “alter ego” of those individual owners.
Many of those who have an interest in a closely-held business entity conduct the business of that entity on an informal or face-to-face basis. Indiana law does not require LLCs, for example, to have operating agreements or conduct regular meetings to operate in Indiana. While corporations are required, under Indiana law, to have annual meetings, many times these do not take place or are not properly documents.
While the efficiencies of operating in such a manner are obvious, the failure to conduct at least annual meetings (and to have the minutes of those meetings properly recorded, voted upon/accepted, and kept by the appropriate corporate officer) in accordance with requirements set forth in a duly accepted operating agreement or set of bylaws can be significant.
Here are some tips that can help your closely-held business avoid veil-piercing concerns:
If you need assistance drafting or amending your operating agreement or bylaws or otherwise have specific questions relating to the sufficiency of your business’s routine practices, please contact Tim Hurlbut with Rubin & Levin, P.C. at email@example.com.
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