A common question we get over here is whether it is important to create a corporate entity and whether a corporate entity truly protects you from personal liability if something goes wrong. The simple answers are that a corporate entity is important to have if you’re running a business, all business activities should run through that entity and the entity will shield you to an extent.
A corporation will protect you, at least in Florida, only to a limited extent based on what is commonly referred to as a practice of piercing the corporate veil. It does not work on all occasions, but plaintiffs’ lawyers commonly try to go after individuals by way of saying that the corporate veil was pierced based on their actions.
In Florida, generally these three things must be proven in order for the corporate veil to be pierced, thereby lending an individual to potential liability:
- The shareholder dominated and controlled the corporation to such an extent that the corporation’s independent existence, was in fact non-existent and the shareholders were in fact alter egos of the corporation;
- The corporate form must have been used fraudulently or for an improper purpose; and
- The fraudulent or improper use of the corporate form caused injury to the claimant.
The three-part inquiry was quoted in a Florida Third District Court of Appeal case P&S & Co., LLC v. SJ Mak, LLC, wherein the court held that the corporate veil was properly pierced. The court cited to a decision from 2008 in Gasparini v. Pordomingo, in which case the court found that none of the three factors were alleged or proven. That case did a bit of work to help comfort business owners who may be in fear of a lack of protections attached to their corporate entities.
The mere fact that an individual is a stockholder and officer of a company does not, without more, create personal liability, said the Court, adding that “the law is clear that the mere ownership of a corporation by a few shareholders, or even one shareholder, is an insufficient reason to pierce the corporate veil . . . even if a corporation is merely an alter ego of its dominant shareholder or shareholders, the corporate veil cannot be pierced so long as the corporation’s separate identity was lawfully maintained.”
Thus, it is important to make sure that even if a corporate entity is, technically, an alter ego of you as an individual, the corporate form is not used fraudulently or for an improper purpose. By avoiding such improper use, you should still be able to avoid personal liability in Florida.