“Piercing the corporate veil” is a legal concept by which a court would look through a corporate entity to find the owners liable for the obligations of the business. In October of this year, the Court of Special Appeals of Maryland considered piercing the corporate veil of a company that was being sued for payment on a contract; but ultimately, the court declined to do so.
When disputes arose over contract terms of payment to the plaintiff in the case, the plaintiff sought to pierce the corporate veil of a subsidiary company in order to collect payment from its parent. The Court of Special Appeals declined to do so, affirming the standard in Maryland for piercing the corporate veil; specifically: (i) proof of fraud; or (ii) the need to enforce a “paramount equity”; that is, ensure a fundamental fairness. One reason for the outcome was that the state’s highest court, the Court of Appeals, had yet to define in workable detail the concept of “paramount equity”.
Although the court did not pierce the corporate veil in this case, the fact that it was asked to do so, and invited the Court of Appeals to advise how piercing might be done under the “paramount equity” concept, serves as a caution to business owners to keep the business identity clearly delineated. Here is a checklist of basic, though not comprehensive, measures to consider:
— Observe all corporate formalities, such as meetings of stockholders and directors, and documentation of those meetings in detailed minutes;
— Officers and directors should actively carry out their appointed duties;
— Ensure complete separation of corporate accounts and any personal accounts of officers, directors and stockholders, and adequate capitalization of the business;
— Documentation of officers loans as such; and
— Maintenance of corporate records, including updated bylaws, stock ledger and payment of corporate personal property taxes.
For more information, please contact Jay Merwin at firstname.lastname@example.org.