A corporation is a legal entity separate and distinct from its shareholders. The corporate form generally shields shareholders from personal liability for the corporation’s debts.
However, shareholders cannot incorporate to limit their liability, and then use the corporate form to cover their fraud. Under such circumstances, a party may seek to “pierce the corporate veil” and hold shareholders personally liable. Florida courts are generally reluctant to disregard the corporate form and require a showing of improper conduct in the formation or use of the corporation.
To pierce the corporate veil, a plaintiff must prove three factors:
- 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 alter egos of the corporation;
- The corporate form was used for a fraudulent or improper purpose; and
- The fraudulent or improper use of the corporate form caused injury to the plaintiff.
If a plaintiff can prove these three factors, then a court may pierce the corporate veil. For example, in Eagle v. Benefield-Chappell, Inc., the Fourth DCA held two shareholders personally liable when the corporation was used to fraudulently increase construction costs to result in a higher fee to the corporation. A court may also pierce the corporate veil where a controlling shareholder causes the corporation to make distributions or otherwise depletes corporate assets for his or her personal benefit while the corporation is unable to pay its debt.
However, in declining to pierce the corporate veil absent a finding of fraud, the Third DCA stated that “mere ownership of a corporation by a few shareholders, or even one shareholder, is an insufficient reason to pierce the corporate veil.” In a recent opinion, the Third DCA also affirmed that “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.”
Other improper conduct that may justify piercing the corporate veil includes commingling funds of the corporation with funds of other corporations, commingling corporate funds with personal funds, utilizing corporate assets for personal use, failing to adequately capitalize the corporation, and using the corporate form to hide assets or otherwise avoid liability.
If a party successfully pierces the corporate veil, the corporation and shareholder will be treated as one person under the law and any acts committed by either the corporation or the shareholder are treated as the acts of both. Thus, if either the corporation or shareholder is bound by a contract, judgment, or otherwise, both the corporation and the shareholder will be equally bound.