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Pitfalls for Business Owners: Recent Court Case on Piercing the Corporate Veil.

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Rosa Parks Circle in Downtown Grand Rapids, getting ready for Christmas.

We are heading towards the end of the year – I love the Christmas season!

One thing that comes to mind for local business owners going into the New Year – make sure that your legal documents and procedures are in proper order.

As every business owner should know, one of the main purposes in creating a business entity is, generally, to limit an owner’s personal liability from the obligations of the company.

Unfortunately, liability is not limited in all cases.

 

Generally though, proper creation of a business entity results in the following:

 

Owners are not personally liable for the debts of the company.

 

A November 22nd  Court of Appeals decision highlights some of the pitfalls that could result in a business owner suffering from personal liability.

Check out Joelle 98 LLC v Stone Central, LLC

Law: Piercing the Corporate Veil
 In general, a corporation is treated as an entity that is completely separate from its stockholders. Foodland Distrib v. Al–Naimi, 220 Mich.App 453, 456; 559 NW2d 379 (1996).
That separation may be ignored, however, “where there is a unity of interest of the stockholders and the corporation and where the stockholders have used the corporate structure in an attempt to avoid legal obligations.” Id.
“Piercing the corporate veil requires the following elements:
(1) the corporate entity is a mere instrumentality of another individual or entity,
(2) the corporate entity was used to commit a wrong or fraud, and
(3) there was an unjust injury or loss to the plaintiff.”Lakeview Commons, 290 Mich.App at 510.
Facts: 
Joelle 98 LLC v Stone Central, LLC and its owner Najib Atisha involved a dispute over payments made under a land contract for commercial property.
Joelle 98 LLC claimed that Stone Central, and its sole member owner, Atisha, were both liable for monies owed to Joelle 98 LLC.
After trial, the Trial Court made the following ruling:
“I find that Mr. Atisha is using his corporations interchangeably and not keeping them as separate entities depending on what he’s trying to do. There really is no reasonable explanation as to why if [Atisha Land] purchased [the property] why Stone Central, LLC would have it as its only asset. Nor is there any reasonable explanation that Stone Central, LLC’s only asset [the property] why would the payments be made to [Atisha Land]. He’s obviously treating these separate entity corporations as if they were one. Moreover, there’s a problem with doing that and this case is a good example of it. Because when you do something like that, when Stone Central, LLC should have received the excess funds that were paid by [Joel Cars], the money should be there to repay Joel [Cars]. However, the money’s not there because Mr. Atisha made this decision to comingle funds among his LLC’s. Accordingly, I find from both of those reasons that the corporate veil should be pierced, that Mr. Atisha should be responsible also on the breach of contract action.” (emphasis added.) Joelle 98, LLC Id. at page 5.
The Court of Appeals affirmed the Trial Court’s decision.  It found, among other things, the defendant “had multiple corporate entities…and he used these entities as his instrumentalities…he co-mingled the assets of the entities…” Id. Pg 7. Further, the Court found that Defendant used his corporate structure simply to to commit a wrong – avoiding to refund the payments to Plaintiff. Id.
Lesson: 
Business owners need to take care in forming as well as maintaining their business in order to keep their personal liability protection.
Don’t take actions, like commingling your personal and business funds, that could jeopardize your protection.
e-mail: Jeshua@dwlawpc.com
Twitter: @JeshuaTLauka
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