Piercing the Corporate Veil…9 Ways to Avoid it.

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Piercing the corporate veil “allows a plaintiff to impose legal liability for a corporation’s obligations, or for torts committed by the corporation, upon some other company or individual that controls and dominates the corporation.”  Cherry, 162 N.C. App. 535 (2004)

Piercing the Corporate Veil (“PCV”) is an equitable principle designed to place the burden of loss upon the party who should be responsible.  Glenn, 313 N.C. 450 (1985).  However, North Carolina courts have recognized that PCV should be applied reluctantly and cautiously.  Dorton, 77 N.C. App. 667 (1985).

In order for PCV to apply the following 3 elements must be satisfied:

(1)  Control, not mere majority or complete stock control, but complete domination, not only of finances, but of policy and business practice in respect to the transaction attacked so that the corporate entity has no separate mind, will or existence of its own;

(2) The control is used by the defendant to commit fraud or wrong, to perpetrate the violation of a statutory or other positive legal duty, or a dishonest and unjust act in contravention of plaintiff’s legal rights; and

(3) The control and breach of duty is the proximate cause of the plaintiff’s injury or unjust loss.

North Carolina courts have set forth a list of factors to consider in determining whether or not to PCV:

(1) inadequate capitalization

(2) non-compliance with corporate formalities

(3) complete domination and control of the corporation so that it has no independent identity

(4) excessive fragmentation of a single enterprise

(5) non-payment of dividends

(6) insolvency of the debtor corporation

(7) siphoning of funds by the dominant shareholder

(8) nonfunctioning of other officers or directions

(9) absence of corporate records

No one factor is determinative, but the first 4 are the most commonly relied upon ”primary factors.”  It is a combination of factors which suggest that the corporate entity has ”no separate mind, will or existence of its own” and was therefore a “mere instrumentality or tool.”  Glenn, 313 N.C. 450 (1985).  

The 9 ways to avoid PCV?  Pay close attention to these 9 factors and do the opposite.  And if you need incentive then see Estate of Hurst v. Morehead I et al, a very recent NC Court of Appeals case upholding a $4.9 Million verdict and imposing personal liability of a member of an LLC under PCV.