Law in the Marketplace: What every New Hampshire business owner should know about veil-piercing

For the Monitor
Published: 10/5/2020 10:00:14 AM

“Veil-piercing” is a legal doctrine that judges in New Hampshire and other states apply to hold individuals who own corporations or LLCs personally liable for actions of their companies, despite the statutory “liability shields” (the “veils”) that normally protect them. Veil-piercing claims involve high stakes: If you lose a veil-piercing claim, you may lose your home, any securities you may own, and all of your other personal assets.

If anybody ever sues your corporation or LLC on any ground, don’t be surprised if the suit includes a veil-piercing claim. Starting in 1933, the New Hampshire Supreme Court has issued dozens of veil-piercing opinions, and while there are no available statistics, it’s safe to assume that over the past several decades, plaintiffs have made many thousands of veil-piercing claims against New Hampshire business owners.

In general, veil-piercing claims can succeed in New Hampshire only if the individual owning the New Hampshire business in question has used his or her company to engage in fraud or other serious misconduct. But veil-piercing is an “equitable” doctrine; this means judges can apply it if, for any reason, they think a business owner has treated a customer, supplier or other third party unfairly. Veil-piercing cases are hard to win. However, even if you think a plaintiff’s veil-piercing claim against you is weak, you may feel compelled to settle the claim in order to protect your personal and family assets.

If you’re a New Hampshire business owner, how can you protect your personal assets from veil-piercing claims? On the basis of New Hampshire cases and cases in other states, I suggest these eight guidelines:

1. Obviously, don’t use your company to engage in fraud or injustice.

2. Especially if you’re the only owner of your company – i.e., if you own a single-shareholder corporation or a single-member LLC – make sure your company has its own bank account, and make sure you keep your personal books, records and bank account completely separate from those of your company. Otherwise, on the basis of the “alter ego” theory, a plaintiff may claim that, effectively, you and your company are the same person.

3. Don’t use company automobiles or other company property as if it were your personal property.

4. On your business cards and in other business documents, make clear to third parties that they’re dealing with your company, not with you personally.

5. If you own your corporation or LLC with one or more other persons, don’t refer to these persons as your “partners”; call them co-owners or co-shareholders or co-members. If you call them “partners,” plaintiffs may claim that your business is really a general partnership, not a corporation or an LLC. General partnerships don’t provide their owners with liability shields.

6. Make sure that when you form your company and thereafter, your company has “adequate capitalization” – i.e., enough cash, insurance and other financial resources to cover its debts as they become due. Otherwise, plaintiffs may claim that because your company’s capital is inadequate, it isn’t a real company and thus can’t provide you with a real liability shield.

7. Make sure your company complies with all of the formalities that are customary for such a company. In the case of corporations, this means issuing proper share certificates to all owners and maintaining minute books with records of annual shareholder and director meetings and with up-to-date registries of the corporation’s shareholders and share certificates.

8. If you’re the only owner of your corporation or LLC but, because of the nature of its business, your company faces significant litigation risks, consider admitting a second owner – your spouse, for example.

In short, if you own or co-own a New Hampshire corporation or LLC, you need to protect your company from veil-piercing by every reasonable means.

John Cunningham is a Concord tax and businesses lawyer and estate planner. He has published Drafting Limited Liability Company Operating Agreements and Maximizing Pass-Through Deductions under Internal Revenue Code Section 199A. Both are the leading books in their fields. If you have business or tax questions you’d like addressed in this column, call John at (603) 856-7172 or e-mail him at lawjmc@comcast.net.




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