Piercing the Corporate Veil: By Other Means

Long ago the concept of corporate immunity was born: an incorporated company which experiences a loss or liability shields the equity owners of that company from personal accountability. Corporations, limited liability companies, limited liability partnerships all share this characteristic. Case law defining the traditional means of piercing the corporate veil is legion and too complicated to be discussed here, except to say that it rarely works, and when it does some species of flagrant fraud is usually involved.

There are however, certain less onerous avenues to imposing a corporation’s indebtedness on the owners of the business. Here are a few:

Unpaid Wages. Under the Washington Wage Act (RCW chapters 49.48 and 49.52) if a corporate employer “willfully” withholds wages, the equity owners of the company who played a role in the decision to withhold may be found personally liability to the worker. A finding of willfulness requires a factual determination that there was no “bona fide dispute” regarding nonpayment of the wages (which can be salary, traditional hourly wages, severance, even unused vacation time). Delaying payment of wages to keep the company alive is not a bona fide dispute. Nor is making the claim that the company does not have the money to pay the workers. If the worker knowingly consents to have his pay reduced or withheld however, then the personal liability feature of the Wage Act is unavailable.

Consumer Protection Act. In certain instances, statutory violations are legislatively expressly designated as unfair or deceptive business practices impacting the public interest and therefore per se violations of Washington’s Consumer Protection Act. Where it can be shown that a shareholder of a corporation “participated in” or “with knowledge approved of” the practice which violates the CPA, then personal liability may be imposed him. There is, however, case law in Washington which draws a distinction between “unfair” business practices which do not carry individual liability implications, and “deceptive” business practices which do.

Professional Services. The corporate structure reliably protects equity owners from liability for business-related losses and claims. In the case of professional service companies however, such as PLLC’s and P.S corporations, the corporate veil protection limited. A professional who owns an equity interest in a professional services company is not shielded from liability for errors and omissions, i.e. malpractice. A professional and in certain instances his or her partners can find themselves personally at risk if malpractice occurs, depending upon the degree of notice and participation in the underlying events. The corporate form furnishes no protection.

Payroll Taxes. Business corporations hire employees. The wages of employees are a corporate expense. Under certain limited circumstances, failure to pay wages or a full wage can result in personal liability for the company’s owners who participate in the decision to withhold wages. There is another level of exposure though. IRS section 941 payroll taxes must in most cases be withheld by an employer. If an owner of the business has check-signing authority and 941 taxes are not paid, the owner may face personal liability for any unpaid taxes, interest and penalties.

Civil Conspiracy. If a corporate entity has, through its officers, directors or owners, engaged in an agreement to commit an illegal activity or to engage in a legal activity in an illegal manner, then the corporate veil cannot be asserted by the owners as a shield to liability. A concerted act in furtherance of the agreement and resulting injury are required. In such a case, the actual conspirators face personal liability, and the corporation may itself be exposed.