In WOODRUFF V. CLARK, the Iowa Court of Appeals on August 15, 2018, pierced the corporate veil of a corporation allowing a creditor access to the owner's personal finances to pay a judgment debt.
The Court stated the owner "egregiously used the corporate bank account for non-corporate purposes, writing as many checks for his other businesses and for himself as for Clark Farms using the corporate account. The only corporate formalities that appear to have been followed after the 2001 incorporation are the filing of taxes, occasional biennial reports, and the officers named on those filings." In addition the Court found the corporate books were not entirely separate from the owner's other finances. The owner's "testimony and actions indicate he did not consider the business or its finances to be a separate entity from himself and his other businesses." Then came the kicker from the Court, "For these reasons, we determine the corporate veil should be pierced."
At the Firm, we created a system to help our serial entrepreneur clients prevent this nightmare. We have a corporate paralegal that runs the system with me. When a client has me serve as their registered agent and they enroll in our Corporate Maintenance Program they help shield themselves from personal liability in the future. We handle filing their annual reports, drafting annual minutes, updating the virtual corporate book and of course we do so timely. All too often a company will designate an internal bookkeeper to maintain their Secretary of State filings. Then this employee goes on leave, retires or is separated and no one is left to handle this important function. When a corporate lawyer handles it, it gets done.
In addition, business owners need to keep their finances separate between their businesses. If money is loaned to the business, a promissory note and minutes need to be written up. This is true, even if it is just "you" signing both. Inter-company transactions need to be treated like third party transactions. Purchase orders should be issued. Finally, if you wouldn't let an employee charge and get reimbursed, the owner should not either.
Corporate formalities can be a nuisance when the person in charge is the same throughout a series of businesses. When business is good and there are not judgments lingering it can be tempting to be sloppy and save the time and the money. However, there is a reason that lawyers recommend forming a company and keeping transactions neat and tidy. When a business cycles and a risk occurs, you will be glad you listened to your lawyer. Stop and consult with an attorney today to clean up your corporate formalities and enroll in a corporate maintenance program. The rainy day will come and following your lawyers advice may be your umbrella.
Contact our Sioux City, Sioux Falls, or Omaha law firm today to discuss your assets.