1. Elements of Piercing the Veil
2. Alter Ego & Mere Instrumentality Theories
3. Improper Conduct

Florida piercing the corporate veil is legal jargon used to describe when the corporate structure is ignored and the burden of personal liability moves to the owners, shareholders, or members. This puts the personal investments, property, real estate holdings, and bank accounts of the owners, members, and shareholders at risk. This means the 'veil' that comes from the corporate structure is lifted and personal protection is lost.

Elements of Piercing the Veil

When the corporate structure is chosen to create a new business entity, one of the key advantages is that the owners, shareholders, and members are separate from the corporate structure. This means the burden of liability related to debts and obligations is placed on the corporation, not on the shareholders. Shareholders cannot, however, use the structure of a corporation as a way to limit their own liability if there has been fraud. If this action is discovered, a party can attempt to "pierce the corporate veil" and hold the shareholder(s) personally liable.

In Florida, proof must be shown that there was improper conduct at the time of formation or in how the corporation is being used. The three factors that must be proved are:

  1. The shareholder(s) acted in a way that fully controlled the corporation to the point that the corporation was not seen or acted as its own entity. The shareholders were merely "alter egos of the corporation".
  2. The corporation engaged in improper or fraudulent purposes.
  3. The improper or fraudulent action caused the plaintiff injury.

Alter Ego & Mere Instrumentality Theories

The alter ego theory can be described as when the personal affairs are so intertwined they cannot be separated from the corporate affairs. Whereas, mere instrumentality theory uses subsidiary corporations as a way to gain access to the parent corporation assets.

In relation to the Florida court system, alter ego theory and mere instrumentality theory are determined to exist when several factors are recognized:

  • The corporation is being controlled by one or a few of the shareholders.
  • Required steps for a corporation are not being followed included operating without directors, not issuing stocks, or not keeping the appropriate corporate records.
  • Personal and corporate affairs are intertwined including corporate funds being used for personal use.
  • Inadequate capitalization.

For cases that include a relationship between a parent and subsidiary corporation, additional factors may be relevant and used to support "piercing the corporate veil":

  • If the officers and directors simultaneously control and operate the parent corporation and its subsidiary.
  • The subsidiary has little to no discretion to how they operate.
  • Both the parent and subsidiary work from the same location, have the same mailing and physical address, and share phone numbers.
  • Contracts of the subsidiaries are completed by employees who work for the parent corporation.
  • Any financial obligations and bank business accounts and are shared between the parent and the subsidiary.
  • The parent takes care of all of the subsidiaries salaries, expenses, and losses.
  • There isn't enough space between how the parent and subsidiary operates.
  • All financing comes from the parent corporation.
  • Income taxes were combined and the returns were filed together.
  • The profits of the subsidiary and parent are combined and not independent of one another.

Improper Conduct

Another form of proof in legal cases is to show that there was an attempt to commit fraud or mislead creditors through the corporation. In Florida, this proof includes the following:

  • The corporation was used as a way to complete an ulterior purpose.
  • The corporation's main purpose was to partake in an illegal purpose, fraud, or evading a statute.
  • The corporation was formed with the intent to commit fraud or other false purposes by the shareholders.
  • The corporation was formed to intentionally avoid personal liability by committing fraud or misleading creditors.

Showing that a corporation is poorly run is not enough to pierce the veil and shift responsibility. Nor is negligence or reckless content, if that is all that can be proven, under Florida law. The main requirement is that there was intent to defraud or act improperly.

To avoid the liability being shifted from the corporation to the person, all steps should be taken to stay within the legal requirements. The initial formation of the corporation and all business from that point forward should be handled in a way to prevent commingling of corporate and personal actions.

If you need help with piercing the corporate veil in Florida, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.