Business Transaction Newsletter – May 2016

NEW CASE ON PIERCING THE CORPORATE VEIL

Asset protection planning is important in business transactions as well as day to day operations of a business.  The Tennessee Court of Appeals issued a recent opinion providing a checklist of the factors Tennessee courts consider in piercing the corporate veil.  I have written about piercing the corporate veil previously (September, 2012), but it is an important topic to keep on the forefront, and especially when a new opinion is issued by the Tennessee courts.

In the case of F & M Marketing Services v. Christenberry Trucking & Farm, Inc., the court set forth a checklist of factors Tennessee courts consider in piercing the corporate veil.  In the F & M Marketing Services case, the court found that the corporate veil should not be pierced because the plaintiff failed to meet his burden of proof.  In making its ruling, the court set forth the following factors to be considered as to whether a corporate entity (or LLC entity) should be disregarded and treated as a “sham” for the individual owners:

1.      Was there adequate paid in capital?

2.      Was the corporation grossly undercapitalized?

3.      Were stock certificates issued?

4.      Was the corporation owned solely by one person?

5.      Did the corporation have the same business location as the individual shareholder?

6.      Did the corporation employ the same employees or attorneys as the individual shareholder?

7.      Was the corporation used as an instrumentality or business conduit for an individual?

8.      Were corporate assets diverted to a shareholder to the detriment of creditors?

9.      Was the corporation used as a subterfuge for illegal transactions?

10.     Was the corporation formed and used to transfer a shareholder’s existing liabilities to it?

11.     Did the corporation fail to maintain arm’s length relationships among related entities?

The court pointed out no one factor is conclusive in determining whether to pierce the corporate veil; rather, courts should rely upon a combination of factors in deciding the issue.  The court also indicated that every case will need a fact intensive inquiry to determine whether to pierce the corporate veil.

MY RECOMMENDATION:  If you go to the effort to establish a corporation or an LLC, be sure to maintain the appropriate corporate/LLC formalities.  Although the court’s factors did not include the following, I suggest the following matters be done as well:

(1)     Be sure and have a separate tax identification number and bank account for the corporation or LLC than from the individual shareholders or related entities.

(2)     Maintain adequate minutes of meetings and have appropriate meetings of the managing body.

(3)     File separate tax returns for the corporation or the LLC from the individual shareholders/members.

Yours very truly,

RAINEY, KIZER, REVIERE & BELL, P.L.C.

William C. Bell, Jr., Attorney at Law