Nevada Piercing the Entity Veil
When you form a separate legal entity, the #1 advantage is to separate your personal and business assets. The legal entity you form will provide a barrier to shield your personal assets from any business lawsuits.
If your business is sued, you may lose all your business assets; but your personal assets should be protected if your entity is properly formed and maintained.
Unfortunately, should you lose a lawsuit and not have insurance to absorb the initial judgment (which is the case for most who form an LLC or corporation), your entity veil would be pierced, and the lawsuit would attach to you, personally. This could be financially devastating. Your personal finances would become paralyzed. Let us explain.
If you are going to apply for any personal financing, a car loan, refinancing your home, or purchasing a new home, being asked, “Are you currently involved in any lawsuits,” or “Do you have any outstanding judgments against you” will immediately cancel your financing opportunity.
This is what it means to be financially paralyzed; the main reason you should form a separate legal entity instead of operating your business as a sole proprietorship.
The ability to protect your entity veil is essential, especially if the owners include partners or another company.
Pierced Entity Veil
It’s essential to do things properly when you incorporate. If the corporation is sued and there aren’t enough assets or insurance, the plaintiff may decide to go through the corporation veil after you, personally.
This is called “piercing the corporate veil,” the consequences to you and your partners can be devastating. This also means that it was proven that you were simply the “alter ego” to the corporation or LLC, which means one in the same.
You are essentially a sole proprietorship again, financially paralyzed, with a lawsuit against you, personally!
How do you keep this from happening? Your new corporate entity must:
– Follow corporate formalities, keeping recorded minutes and resolutions;
– Proper capitalization is a must, which is the amount of money you put into the corporation to get started;
– Do not commingle funds with your personal account (this is easy to do when you have multiple credit cards in your wallet). Keep your personal and business expenses separate.
Entrepreneurs don’t understand that when you form an LLC or corporation, you have liability protection on day one of your formation. Still, to maintain that level of protection, you must operate your entity as a separate legal entity, where most people fail.
Nevada Corporate Veil Cases
It’s Extremely Difficult for Anyone to Pierce Your Nevada State Corporate Veil.
First, what exactly does “piercing the corporate veil” mean? You must follow certain corporate formalities when you form a corporation, whether in Nevada, California, Texas, or wherever.
Remember, a Nevada state corporation can do everything you can do except act or think, so it does those things through your board of directors, officers, and shareholders.
If your corporation does not keep accurate records of meetings by minutes, and if the corporation commingles funds, it makes it easier for someone to pierce your corporate veil if the corporation is involved in a lawsuit.
Low capitalization is another reason why corporate veils get pierced.
In some states, like California, we recommend you capitalize your corporation with at least $1,000.
If you don’t, it’s easier for someone to prove that you are simply the alter ego of the Nevada state corporation (one and the same as the corporation), and then pierce your corporate veil! How does Nevada feel about this? Nevada is called a “thin capital state,” meaning you can form a Nevada corporation for as little as $100.
Nevada has a certain attitude about piercing the corporate veil, so major corporations domicile in Nevada. Let’s explain.
The Nevada State Test - Attempting to Pierce the Corporate Veil
First, in Nevada, anyone trying to sue you must pass a three-prong test. They must prove all three parts to pierce your corporate veil:
The corporation must be influenced and governed by the person asserted to be the alter ego. There must be such unity of interest and ownership that one is inseparable from the other.
The facts must be that adherence to a separate entity’s corporate fiction would, under the circumstances, sanction fraud or promote injustice.
The burden of proof for all three “general requirements” is on the plaintiff who is seeking to pierce the veil, and a failure to prove any of the three will result in your veil not being pierced.
Essentially, Nevada says that unless they can prove fraud, your corporate veil will not be pierced. That is incredible protection.
Nevada State Corporation – Case In Point
The landmark case that proves this point is the case of Roland vs. Lepire (1983). We recommend that you keep accurate corporate records to protect your corporate veil and make sure you have adequate capitalization as well.
In Roland, the corporation had a negative net worth at the time of the trial, so it was clear it was inadequately capitalized.
On top of that, the corporation never held formal directors or shareholders meetings, never started or kept a corporate minute book, never paid dividends, and didn’t pay salaries to the officers or directors.
On the other hand, the corporation managed to secure a corporate checking account, as well as a general contractor’s license and a framing contractor’s license, “both in its name.”
What happened? The court concluded that “Although the evidence does show that the corporation was undercapitalized and that there was little existence separate and apart from [the two key shareholders], evidence was insufficient to support a finding that appellants were the alter ego of the corporation.”
The Nevada Supreme Court has made clear that unless the plaintiff acting against you can meet the burden of proving that “the financial setup of your corporation is only a sham and caused an injustice, ” your veil is unlikely to be pierced.
The Nevada state corporation appears as an “Iron Fortress” to creditors.
The corporate veil has only been pierced two-times in Nevada in the last 40 + years. That was a case where the corporation was doing business in Nevada and had committed fraud against a Nevada resident.
Recent Piercing Cases
Nevada Update: A Member of a Nevada LLC is Generally Not Liable for LLCs Debts.
Even if the alter ego doctrine does apply to Nevada LLCs, and that is still uncertain, there may be jurisdictional obstacles blocking your client’s attempt to sue the LLC members.
Because an LLC is a distinct entity, separate from its managers and members, “personal jurisdiction over a limited liability company does not automatically extend to its members.”
Nevada Update: Nevada’s Supreme Court Confirms That Limited Liability Companies Are Subject To The Alter-Ego Doctrine & Corporate Veil-Piercing Claims.
What does this mean?
Nevada Supreme Court wrote: “As recognized by courts across the country, LLCs provide the same sort of possibilities for abuse as corporations, and creditors of LLCs need the same ability to pierce the LLCs’ veil when such abuse exists.”
This is why our LLCs are complete with the right operating agreement and minutes, meetings, and resolutions that match a corporation. It is essential to operate your LLC properly.
The decision’s holdings on the personal liability of managers and members draw new attention to the importance of determining what acts a company will indemnify its managers or members for taking.
While this case may lead to a rise in alter-ego claims, the pleading standards for bringing such claims, including the need to allege acts constituting an abuse of the corporate form leading to injustice, remain a barrier to drive-by allegations of alter-ego.
Ultimately, you can’t commit fraud or acts constituting an abuse of the corporate form. You must operate the LLC as a separate legal entity, especially in the world of e-commerce that has a high degree of product risk, like misleading reviews, to get an edge over your competition.
There are plenty of $99 LLC online formation services, but you will have ZERO protection if you have a complete formation.