Piercing the Corporate Veil in Florida and How an Operating Agreement May Help

Key Takeaways on Piercing the Corporate Veil in Florida

• Florida courts usually pierce the veil for fraud or misconduct – not for simple negligence.
• Written agreements and good record-keeping provide great protection against piercing the veil.
• Florida doesn’t require an operating agreement — but not having one weakens your liability shield against attempts to pierce the corporate veil.
• Using business funds for personal expenses (and vice versa) is considered a red flag. 

In Florida, business owners usually conduct business under some form of business entity, such as a Limited Liability Company or Corporation, to protect their personal assets. But is this liability protection guaranteed forever? The truth is that it is not and courts may “pierce the corporate veil” to expose business owners to personal liability in certain situations.

This article will explore and explain

• What “piercing the corporate veil” really means in Florida
• When do courts allow it and why
• How well-drafted governing documents (operating or shareholder agreements) can provide extra protection
• FAQs and actionable tips for any Florida business owner. 

What is piercing the corporate veil?

Piercing the corporate veil is a legal doctrine that allows courts to disregard the separate business entity of a corporation or limited liability company (LLC) and hold the shareholders/members personally liable for the entity’s debts or obligations. The “veil” refers to liability protection or insulation provided by the entity, while “piercing” refers to the ability of third parties to ignore such veil and attach to the owner(s) being protected. It’s important to note that this remedy is usually allowed in only exceptional situations. Florida courts are typically reluctant to pierce the corporate veil without clearly showing improper conduct.  

To understand the effect of piercing of the corporate veil in Florida, it’s important to note that normally:

• A corporation or LLC shields the personal assets of the owners, shareholders and members.
• This means that creditors can only go after the business, not personally against the owners. 

But when the courts allow the veil to be pierced:

• The personal savings, homes, and other assets of the owners may be at risk.
• This typically happens as a result of fraud, misuse of the company or a failure to follow legal formalities (this is the most common reason for piercing through the veil). 

When Do Florida Courts Pierce the Veil?

When Florida courts are considering whether to pierce the veil, they require a claimant or plaintiff to prove three important elements by the preponderance of the evidence, which is the standard of proof required in civil case that requires the presentation of evidence enough to convince a judge or jury that the claim is more true than not.

While Florida courts rarely pierce the corporate veil, when they do, it’s serious!

The three-pronged test is required to be proved by the Florida courts 

A plaintiff must show:

• Complete domination – meaning the owner(s)/shareholder(s) dominated and controlled the entity to such an extent the entity’s independent existence was effectively non-existent and the owner(s)/shareholder(s) were simply alter egos of the entity;
• Improper conduct – the corporate or LLC form was used fraudulently or for an improper purpose; and
• Resulting harm –the fraudulent or improper use of the entity caused injury to the plaintiff.

Courts in Florida require strong evidence and may also consider whether the corporation was created for an illegal, fraudulent or unjust purpose and whether there was a misuse of the entity.

The courts also emphasize the importance of maintaining the distinction between the entity and the owner(s)/shareholder(s) and will only pierce the veil when necessary to prevent injustice or inequity. So, while simply comingling of funds may not be sufficient grounds to pierce the veil in Florida, it’s considered a red flag and should be avoided!

3 Common Mistakes That Lead to Veil Piercing

In Florida, there are a few common mistakes made by business owners that should be avoided to ensure the legal protection of the entity remains intact. They are:

• Comingling Funds
  • Owner(s) and shareholder(s) should not use the business account like a personal bank or pay for personal bills from the entity’s accounts.
• Failing to Maintain Records
  • It is imperative to ensure all financial records for the entity are complete and accurate. Furthermore, having governing documents such as operating agreements or shareholder agreements provide additional safety against piercing of the veil.
• Undercapitalizing the Business Entity
  • Actions such as failing to properly fund the business entity or hiding assets can lead to the satisfaction of the 3-pronged test to allow piercing of the veil.

How an Operating Agreement can Protect Business Owners in Florida

An Operating Agreement is the governing document of an LLC, similar to the bylaws and shareholders’ agreement of a corporation.

It serves as a rulebook for an LLC and while Florida law does not mandate that each LLC has one, a properly drafted Operating Agreement has been shown to be one of the best defenses against the piercing of the veil.

Operating agreements are important because courts generally look favorably on well-run companies with clear governance documents. Further, operating agreements help with establishing the following:

• They reflect the serious nature of the business and the owners are not simply using it as their own personal bank
• They clarify the roles and responsibilities of the member(s)
• They outline the decision-making process of the entity
• They help to maintain clear and comprehensive business records.

To maximize the property against piercing of the corporate veil in Florida, an operating agreement should include several key provisions. These provisions include references to:

Single-Member LLCs in Florida are especially at Risk

While the rule of thumb is that Florida LLCs generally provide excellent liability protection, single-member LLCs (SMLLCs) are at a particularly higher risk of having the corporate veil pierced.

Practically speaking, Courts often scrutinize SMLLCs far more closely because (1) there are no other members to enforce business formalities, (2) it’s far easier to blur the line between personal and business assets/activities and (3) a SMLLC owner usually makes all decisions without oversight.

Historically, Florida courts have pierced the veil of SMLLC when the owner has failed to properly treat the business as a separate legal entity. Courts prefer SMLLC owners who treat the company like a traditional and true business, not like a casual side-hustle of the respective owner.

It’s important for an SMLLC owner to avoid the following high-risk behaviors:

• Not having an operating agreement
• Comingling personal and business funds
• Having no clear documentation, such as financial records, meeting notes or contracts

SMLLC owners may protect themselves and their entity by

• Drafting a strong operating agreement – it is important to outline the owner’s role, capital contribution and decision-making process even if they are the only owner.
• Maintain business formalities – such as opening separate bank accounts, tracking business expenses and documenting major business decisions.
• Keep Adequate Records – this relates to purchase/sales receipts, tax filings, contracts and license registrations. 
• Consider obtaining Liability Insurance – general and professional liability insurance can provide an extra layer of protection against challenges.

Piercing the Corporate Veil FAQs

Conclusions on Piercing the Corporate Veil in Florida

Piercing the corporate veil is a serious risk, but it can be prevented with proper planning and preparation.

Running your business properly, keeping finances separate, and having a well-drafted operating agreement are your best defenses.

If you’re unsure whether your LLC is protected, consult a Florida business attorney to review your structure and documents. Contact us today to learn about how we may be able to help!