Indiana Corporations- Piercing the Corporate Veil

In a 2005, Court of Appeals case, Brant v. Krilich, the Court listed the eight factors and described the standard by which a corporate veil could be pierced:

In deciding whether a plaintiff has met the burden to pierce the corporate veil, the court considers whether the plaintiff has presented evidence showing:  (1) undercapitalization,  (2) absence of corporate records,  (3) fraudulent representation by corporate shareholders or directors,  (4) use of the corporation to promote fraud, injustice, or illegal activities, (5) payment by the corporation of individual obligations,  (6) commingling of assets and affairs,  (7) failure to observe required corporate formalities, or (8) other shareholder acts or conduct ignoring, controlling, or manipulating the corporate form.

From a lawyer’s perspective, this list is enormous.  There are numbers of “Do’s” and “Do Not’s” in this list of eight factors, far too many to discuss in this article alone.  Unfortunately, very few lawyers take the time to educate their clients on how to operate a corporation or LLC.  Few lawyers list or describe the eight factors that could cause a corporation or LLC to be ignored.  Most lawyers simply file Articles with the Secretary of State to form the corporation, LLC or other entity, and create By-Laws or an Operating Agreement, and maybe a few minutes of an organizational meeting.  And that’s about it.  No training.  No education.  No practical guidance or explanation.  The clients who receive these services and nothing more are often left with a false sense of protection by their new corporation or LLC, and that is a shame.

If you are operating a business, you need to operate that business in a limited liability entity of some sort.  You also need documents and training, as follows:

1.   A complete record book with proper Articles; By-Laws or an Operating Agreement; minutes of meetings; notices or waivers of notices of those meetings; resolutions; stock certificates; buy-sell and related agreements among owners; certificates of assumed business names; and more.
2.   A plan to maintain the corporate record book.
3.   A registered agent that can easily receive notices and service of process for your entity.
4.   A business plan.
5.  An insurance plan to integrate with your business plan.
6.  The use of other asset protection techniques.
7.  A tax plan integrated with your business plan.
8.  Education on how to operate the entity and its finances- practical lessons like how to complete and sign contracts.
9.   Adequate funding of the business.
10.  A plan to pick the correct entity form and structure.
11.  A strategy for maintaining the entity after it is formed.
12.  The correct tax documents and an EIN.
13.  An education on fraud, use of contractors and employees, risks of personal liability, isolating risks as to co-owners or spouses, risk assessment, etc.
14.  Avoid off-shore trusts, Nevada corporations, land trusts disguised as living trusts, and other tricks.  Stick with time-tested, lawful entities, insurance and good business practices.
15.  Avoid using an entity as a means of committing fraud or fraudulent transfers.
16.  and much more. . .

It typically takes us an hour and one-half at a minimum to teach clients how to structure and operate a simple business as a corporation or LLC.  If all you have done is filed the one-page form on the Secretary of State’s website and paid your $90.00 filing fee, then you have not yet satisfied the requirements of the Court of Appeals in Brant v. Krilich.

We strongly recommend that you schedule a conference with a knowledgeable business law attorney.  Do not make the mistake of having your accountant do your legal work.  Go see a lawyer who knows Indiana law and how to assist and educate you in the creation, organization and operation of your limited liability entity.

At a minimum, utilize Indiana forms from an Indiana lawyer to form an Indiana business.