The Corporate Veil

As a general rule, when a Georgia corporation (which, for the purposes of this discussion, includes all limited liability entities such as limited liability companies and limited liability partnerships) is formed, it is an entity that exists separate from its owners. Georgia law allows the corporation’s owners to operate a business under a “veil” of protection. That veil can provide the owners protection from certain types of liability of the corporation. However, under certain circumstances, the courts will “pierce” the veil and hold the owners liable.

When a corporation engages in fraud or other wrongful acts, is a sham, or is used exclusively for the personal benefit of its owners, courts may disregard the separate corporate existence and impose personal liability on the owners.  In such cases, courts look beyond the form of the corporation's actions to the substance. The facts must show some misuse of the corporate privilege. 

Courts generally require fraud, illegality, or misrepresentation before they will pierce the corporate veil. Courts also may ignore the corporate existence where the controlling owner or owners use the corporation as merely their instrumentality or alter ego, where the corporation is undercapitalized, and where the corporation ignores the formalities required by law (e.g. annual meetings, failing to identify the business as an entity with limited liability, etc.) or commingles its assets with those of a controlling owner or owners. In addition, courts may refuse to recognize a separate corporate existence when doing so would violate a clearly defined statutory policy.

If business owners take the right steps, they can protect themselves from a variety of liabilities by incorporating their business in Georgia. Proficient legal counsel can provide the help and advice to business owners to ensure their business is set up correctly and retains its veil of protection.