In our previous blog series on general partnership, we talked about what general partnership is, how it is formed, and why it is important for business owners to know about it. We mentioned that one of the most peculiar features of a general partnership is that it can be formed inadvertently and that, once formed, each partner is personally liable for the partnership’s obligations. In a subsequent blog series “Can I Be Held Liable as Partner When in Fact I am Not?… Read the rest
We have looked at the laws governing veil piercing in New York, Wyoming, Texas, and Maryland. Veil piercing is available in most other states in varying degrees, but it bears repeating that limited liability is the rule and piercing is the rare exception to be applied only in cases involving exceptional circumstances.[1] The cases we discussed here are merely a snapshot of veil piercing laws in different states and examples of situations where courts allowed veil piercing, not necessarily indicative of that particular state’s business-friendliness, as veil piercing is highly fact-intensive. … Read the rest
Maryland.
In recent years, Maryland has become one of the most difficult states in which to pierce the corporate veil, with a success rate at about 25.81%.[1] This is an interesting reversal, given that the state had a relatively liberal 40% rate until 1986.[2] Under Maryland law, where there is no allegation of fraud, a court may still disregard the corporate entity and establish personal liability to enforce the so-called a “paramount equity,”[3] but this seems to be a pretty tough standard to meet.… Read the rest
Texas.
In Texas, veil piercing is in large part governed by the statute. Specifically, a shareholder is not liable to the corporation or its creditors with respect to, among other things, contractual obligations of the corporation on the basis that the shareholder was the alter ego of the corporation or on the basis of actual or constructive fraud, a sham to perpetrate a fraud, or other similar theory.[1] As in Wyoming, a shareholder is also not liable for the corporation’s failure to observe any corporate formality, including the failure to comply with the statute or the certificate of formation or bylaws of the corporation.… Read the rest
Wyoming.
Wyoming courts allow veil piercing in about 61.90% of cases, far exceeding the national average, though the small size of the dataset (21) makes it difficult to say that the rate is statistically meaningful.[1] In Wyoming, veil piercing law was also modified by statute around the time this number came out, so that failure of an LLC to observe any particular corporate formalities is no longer a ground for imposing liability on the members or managers for the liabilities of the company.… Read the rest
New York.
According to a 2010 study of a dataset of 2908 cases from 1658 to 2006, New York courts allow veil piercing in about 49.81% of cases and is among the most prominent producers of veil piercing cases.[1]
In Agai v. Diontech Consulting, Inc.,[2] a recent case, a creditor sought to pierce the veil of a corporation, arguing that the principals operated the consulting business without corporate formalities for their own unjust enrichment and to avoid the judgments obtained by the creditor. … Read the rest
In our previous blog series comparing limited liability company (LLC) statutes, we briefly mentioned that there are situations where courts “pierce the corporate veil” so as to hold LLC members liable for business debts. We also mentioned that veil piercing requires a highly fact-intensive analysis and that the law varies widely from state to state. Courts have applied or declined to apply this remedy in a manner that has often been confusing and inconsistent, as two luminaries of the legal world observed over a score of years ago: “Piercing seems to happen freakishly. … Read the rest
Relationship Between Partners
We have discussed fiduciary duties in the context of LLCs in our previous posts. Just like LLC managers, partners in a general partnership owe fiduciary duty to the partnership. Thus, partners must act as an ordinarily prudent person would, refrain from competing with the partnership, and generally act in good faith. Additionally, they must put the best interests of the partnership ahead of their own. So, in the farming partnership case above, the parties owe fiduciary duties to the partnership, which they would not otherwise owe, if it was just a farming agreement. … Read the rest
All postings are intended to be planning tools to familiarize readers with some of the high-level issues discussed therein. No posting is intended to be a comprehensive discussion and additional details should be discussed with your transaction planners including attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances. This article should not be treated as legal advice to any person or entity.
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