Michigan

How a Michigan Corporation Can Prevent Its Corporate Veil from Being Pierced

One of the main reasons businesses are conducted through corporations is to protect owners from personal liability for company obligations. Preserving limited liability is one of the most important aspects of operating a corporation because protection from liability can be lost unless certain formalities are observed.

There are three main ways liability protection can be lost:

1. Invalid incorporation.

2. Improper execution of documents.

3. Piercing of the corporate veil.

Invalid Incorporation
To form a corporation in Michigan, articles of incorporation must be completed, signed and filed with the Michigan Department of Labor and Economic Growth. In addition, certain internal corporate documents must be prepared and signed by the appropriate parties. If a corporation is not properly incorporated, stockholders may not have limited liability if a legal proceeding is brought against the corporation and may be required to personally pay if a judgment is obtained against the corporation.

How to Properly Sign a Document on Behalf of a Corporation
When signing a document on behalf of a corporation, it is important to remember that a corporation is treated as a separate individual under the law. As such, it is imperative that documents are properly signed or the person signing may find himself or herself on the hook for that obligation. Specifically, when documents are signed on behalf of a corporation, both the name of the corporation, the name of the person signing, and that person's title must be stated.

For example:

THE MICHAEL J. HAMBLIN CORPORATION
By: /s/ Michael J. Hamblin
Name: Michael J. Hamblin
Title: President

Piercing the Corporation Veil
A court may pierce a corporation's protective liability veil if the corporation is undercapitalized, or if it can be proved that the corporation is nothing more than a sham set up to defraud. If corporate stockholders and representatives do not follow the required formalities, a court could rule that the corporation is not really functioning as a corporation, but rather as what is known as the "alter ego" of the stockholders. To keep the corporate veil from being pierced, it imperative to keep proper minutes of corporate board and stockholder meetings. It is also imperative that corporate and non-corporate monies are not co-mingled.

The measures discussed in this post, among others, can help to ensure that a corporation will be treated as a separate entity under the law and protect its stockholders from personal liability for corporate obligations. To achieve the greatest level of protection when operating a corporation, it is important that an experienced Michigan business lawyer be consulted before incorporation and at regular intervals thereafter.

Full post as published by Michigan Business Lawyer Blog on March 14, 2008 (boomark / email).