In prior Blog posts, our Lynnfield based Lawyers specialized in Massachusetts business law explained that the main benefit of a properly formed Massachusetts corporation is the limited liability afforded its officers and shareholders. One exception to limited liability however is disregarding the corporate entity, otherwise known as “piercing the corporate veil.” The exception allows a claimant (such as a creditor) to hold either the officers or shareholders personally liable for claims against the corporation.
In My Bread Baking Co. v. Cumberland Farms, Inc., 353 Mass. 614, 619 (1968) the Massachusetts Supreme Judicial Court stated that the criteria for disregarding the corporate entity:
‘(a) when there is active and direct participation by the representatives of one corporation, apparently exercising some form of pervasive control, in the activities of another and there is some fraudulent or injurious consequence of the intercorporate relationship, or (b) when there is a confused intermingling of activity of two or more corporations engaged in a common enterprise with substantial disregard of the separate nature of the corporate entities, or serious ambiguity about the manner and capacity in which the various corporations and their respective representatives are acting.’
The main reason usually cited for disregarding the corporate entity is, in rare situations, to prevent gross inequity by providing an injured party a remedy by permitting parties to disregard the corporate protections. A plain example of a situation where an entity is disregarded is when a small business owner runs a “shell corporation” (a corporation without any meaningful assets or capital) that comingles business with personal financial affairs, that doesn’t follow corporate reporting, formal procedures, nor officer duty requirements, and that is used to provide a direct source of funds and/or assets to a shareholder, or that is used to perpetuate fraud.
Massachusetts court use 12 factors to determine whether to disregard a corporation’s liability protections (e.g. pierce the veil):
1. pervasive control;
2. nonfunctioning of officers and directors;
3. confused intermingling of business activity assets, or management;
4. thin capitalization;
5. use of the corporation in promoting fraud.
6. nonobservance of corporate formalities;
7. common ownership
8. absence of corporate records;
9. no payment of dividends;
10. insolvency at the time of the litigated transaction;
11. siphoning away of corporate assets by the dominant shareholders;
12. use of the corporation for transactions of the dominant shareholders;
Evans v. Mulicon Construction Corp., 30 Mass. App. Ct. 728, 733 (1991).
If you as a Massachusetts business owner is interested in reviewing the validity of your organization, or are interested in learning more about the services we provide in business legal consulting, please contact us at 781-463-6063.