The Corporate Veil and Subsidiaries
The corporate form limits the liability of owners and shareholders. Normally, they are not liable for the corporation's debts. This is not true, however, if a court determines that the corporation is an “alter ego” or “mere instrumentality” of its shareholders. Avoiding this can be accomplished by following several rules.
Observe corporate formalities and keep complete and accurate records of all meetings and finances.
Separate the finances of the owner, or parent company from that of the corporation. This means separate bank accounts and records.
An adequate and reasonable amount of capital investment is necessary. An owner or parent company cannot flood a corporation with an amount of money inconsisnent with the level of risk associated with the business. Likewise, large amounts of money cannot be frequently taken from the corporation by the owner or parent company.
The corporation must be under the control of a board of directors and not the owner or parent company. A separate corporate control structure must be in place for each subsidiary.
Transactions between a parent and subsidiary must be on commercially reasonable terms. These transactions do not, however, need to reflect a transaction that would be offered to an outsider.
Maintaining the public perception of independence is important; a subsidiary must not be referred to as a “department” or “division” and must not rely heavily on the parent company's name or logo.
A more in-depth article on this topic by Scott J. Fisher and Patrick S. Coffey entitled “Maintaining the Veil” appeared in The National Law Journal on Monday, June 27, 2005.
Observe corporate formalities and keep complete and accurate records of all meetings and finances.
Separate the finances of the owner, or parent company from that of the corporation. This means separate bank accounts and records.
An adequate and reasonable amount of capital investment is necessary. An owner or parent company cannot flood a corporation with an amount of money inconsisnent with the level of risk associated with the business. Likewise, large amounts of money cannot be frequently taken from the corporation by the owner or parent company.
The corporation must be under the control of a board of directors and not the owner or parent company. A separate corporate control structure must be in place for each subsidiary.
Transactions between a parent and subsidiary must be on commercially reasonable terms. These transactions do not, however, need to reflect a transaction that would be offered to an outsider.
Maintaining the public perception of independence is important; a subsidiary must not be referred to as a “department” or “division” and must not rely heavily on the parent company's name or logo.
A more in-depth article on this topic by Scott J. Fisher and Patrick S. Coffey entitled “Maintaining the Veil” appeared in The National Law Journal on Monday, June 27, 2005.