A court may decide to pierce the corporate veil that shields the shareholders from individual liabilities resulting from a misuse of the corporation status under the following circumstances: proved fraud by the members of the corporation in an attempt to escape payment to a plaintiff through the establishment of alter ego corporations. This is most likely to occur when the proceedings from the alter ego corporations are used on the personal benefits of the shareholders without proper records of transaction and tax payments (Walston-Dunham, 2011). Another instance involves a case of inadequate capital to run the corporation’s investments and finally a scenario in which the corporation fails to recognize the corporate formalities (Walston-Dunham, 2011). The case between Litchfield and Mary Ann Howell with colleagues is a perfect illustration of these scenarios. Based on the arguments presented by the plaintiff, Litchfield, Howell has fulfilled all three conditions for warranting the piercing of the corporate veil (Lavery et al., 2002).
To avoid piercing the corporate veil, Howell and her colleagues should have followed the correct procedures for forming a corporation. They should have followed at least seven steps in establishing the two corporations, antiquities, and design. The first step was to choose a corporations name which they had done (Mancuso, 2017). Secondly, they were to prepare and then file the articles of the corporations, thirdly they were to organize, and set up books of records for the two separate entities. After establishing the books of records, they were to proceed to the formation of bylaws to govern the entities. This was to be followed by the appointment of the board of directors, for the two entities, to oversee the operations of the corporation (Mancuso, 2017). So far, there is no evidence that they had done any of these except the assignment of names for the Design and Antiquities entities. The setup of the board of directors would have sat for a first meeting and minutes of the board meeting taken. Finally, stock certificates were to be signed, shareholders receipts prepared, and the stock certificates distributed (Mancuso, 2017).
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References
Lavery, C. J., and Schaller and Peters, Js. Argued November 27, 2001—officially released June 4, 2002 (Appeal from Superior Court, judicial district of Litchfield, Gill, J.)
Mancuso, A. (2017). Incorporate Your Business: A Step-by-Step Guide to Forming a Corporation in Any State . Nolo.
Walston-Dunham, B. (2011). Introduction to law. Cengage Learning.
