While “veil piercing” sounds vaguely sexy, it is a topic of the utmost concern to business stakeholders and entrepreneurs. Here’s how it works.
Corporate and limited liability company (LLC) forms provide business stakeholders a shield from personal liability (there are exceptions for bad acts such as fraud, etc.). In fact, this shield is a key reason to employ one of these business forms.
Be forewarned however, the shield is not bullet-proof, and this is where veil-piercing comes in. Veil-piercing is where a claimant pursues damages from the stakeholders personally. It is an equitable remedy derived from common law. How can this be, one asks? The answer is that in order to take advantage of the liability shield, business stakeholders must scrupulously observe requisite formalities and meet other requirements.
The corporation pre-dates the LLC, a relative newcomer to commerce. Thus, much of our statutory and common law pertains to the corporate form. See Verni ex rel, Burstein v. Harry M. Stevens, Inc., 387 N.J. Super 160 (N.J. App. Div. 2006) cert. den. 189 N.J. 429 (N.J. Jan. 31, 2007). The legal trend is for courts to hold LLCs to similar albeit less rigorous corporate requirements. For an interesting NJ case on this trend, see D.R. Horton Inc. – New Jersey v. Dynastar Development, L.L.C., 2005 WL 1939778 (N.J. Super. Ct. Law Div. 2005) (unpublished). We can, nevertheless, draw some generalities. One of the easiest “wins” is to carefully adhere to all formalities dictated by the form, including but not limited to:
- Ensure your filing was completed properly and that formation documents are in place and correctly completed.
- Meet all stakeholder meeting requirements.
- Include your designator – for example, “Inc. or LLC” – in the course of “doing business” such as:
- Contracts, agreements, and other legal instruments; and
- All business cards, stationery, envelopes, and forms.
Note that acceptable designators for a NJ LLC are Limited Liability Company, L.L.C., or simply LLC. N.J.S.A. 42:2B-3, 2010 N.J.S.B. 914 (NS).
To assuage concerns of our creative team-members, a logo need not include the designator assuming it detracts from design aesthetics, but care should be taken to display the designator as nearby as possible. This rule of thumb applies to hard-copy and electronic media alike. In a parallel vein, a trademark or servicemark application need not include the designator.
Remember. How a business puts itself out to customers, business partners, and the like is a key question in determining risk. This risk is mitigated by using designators religiously, as a way of putting folks on notice they are dealing with a particular form of business. And the purpose of observing these formalities is to mitigate the risk of veil-piercing. It makes sense, therefore, to err on the side of being overly-cautious.