Legal Question in Business Law in Michigan

Re: Closing Business

Generally, a corporation is defined as a legal entity that exists separately from its shareholders. Consequently the rights and obligations of a corporation exist separately from those of the shareholders and the risk to the shareholder typically is limited to his investment in the corporate enterprise. This desire to shield themselves from personal liability is one of the reasons why people establish business entities such as corporations: they have an unabiding interest in shielding themselves, their personal assets and interests from creditors.

You may have heard of the expression, �an old raincoat will never let you down.� While this may be true, it may also be true that a raincoat constructed for improper purposes will let you down and as a shareholder of a corporation formed from improper purposes, you could wind up getting wet. In these instances, courts allow creditors to do what is called �pierce the corporate veil�, meaning, the court allows a creditor to attack the assets and interests of the individual shareholders as if the corporate entity did not exist. In Windsor v. Huron Machine, Inc, the Court of Appeals stated that �The act of piercing the corporate veil, or disregarding the corporate entity, is �[t]he judicial act of imposing personal liability on otherwise immune corporate officers, directors, and shareholders for the corporation's wrongful acts.�

If a court determines that the corporate form is being for such wrongful acts, it will allow the corporate veil to be pierced. Examples of such abuse would be when the court determines the corporation exists as an �alter ego� or �instrumentality� of its shareholders. The legal tests used in determining whether or not a corporation is an alter ego or instrumentality of its shareholders are vague, but some of the elements used to determine a court will pierce the corporate veil are:

� Where there is evidence of commingling of corporate assets with personal assets;

� The corporation lacks corporate formalities, meaning they don�t hold regular meetings of directors and shareholders, records are poorly maintained, etc.

� The corporation issued no stock;

� The corporation is under-capitalized;

� There is dominion and control by shareholder so comletely controlls the corporation's policy that the shareholder can have no separate mind, will, or existence of its own;

* The corporation is an alter ego, instrumentality, of the shareholders or there is a unity of interest.

Broadly speaking, the corporate veil

will be pierced only if the corporate form was used to commit fraud or wrong, perpetuate the violation of a statutory or other positive legal duty, or commit a dishonest or unjust act in contravention of the creditor�s legal right. Barring anything that resembles the foregoing, you should be personally immune from any creditors that may want to rain on your parade.