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"Piercing the Corporate Veil" in Denver

One of the advantages of operating a business as a corporation in Denver is that, with some exceptions, shareholders (owners), officers and directors normally do not have personal liability for corporate debts. Under certain circumstances, however, there may be personal liability, such as for certain unpaid taxes and when equitable principles cause the court to “pierce the corporate veil,” where the court looks behind a corporate entity and takes action as though no entity separate from the members itself existed.
In the recent (October 29, 2009) Colorado Court of Appeals opinion in McCallum Family L.L.C. v. Winger, the court succinctly sets out the requirements for piercing the corporate veil. These requirements are:
1. The corporation is the “alter ego” of the person or entity in issue. Factors determining status as an alter ego may include whether:
a. The corporation is operated as a distinct business entity;
b. funds and assets are commingled;
c. adequate corporate records are maintained;
d. the nature and form of the entity’s ownership and control facilitate
misuse by an insider;
e. the business is thinly capitalized;
f. the corporation is used as a “mere shell”;
g. legal formalities are disregarded; and
h. corporate funds or assets are used for noncorporate purposes.
Not all of the requirements need be present in every case. Each case must be decided on its unique factors.
2. The court must determine whether justice requires recognizing the substance of the relationship between the person or entity sought to be held liable and the corporation over the form because the corporate fiction was “used to perpetrate a fraud or defeat a rightful claim.”
3. The court must consider whether an equitable result will be achieved by disregarding the corporate form and holding a shareholder or other insider personally liable for the acts of the business entity.
A major lesson to be learned from the foregoing principles is that a corporation must be operated in all respects as a business entity separate and apart from its shareholders, officers, directors and insiders. The requirements of paragraph No. 1 should be strictly observed; otherwise the benefits of immunizing individuals from corporate debt may be placed in jeopardy.