Truck Law

A Transportation Law Blog from TransportationAttorneys.NET

Category: Corporate Governance

Protect your Trucking Company from Piercing of the Corporate Veil

by G. Spencer Mynko, Esq.

Trucking is a risky business. Disaster looms around every corner and the consequences of negative events can destroy companies and the livelihood of their owners. This rings true for large trucking companies and individual owner operators: anyone involved in trucking and transportation needs to take steps to protect themselves from overwhelming liability. The most common way trucking companies, including owner operators, accomplish this is by forming a corporation or limited liability company (LLC). The reason for this is so the owners won’t be held personally liable for business debts the corporation is unable to pay.

However, courts will sometimes hold a corporation’s owners and shareholders personally liable for business debts. This is called “piercing the corporate veil”.  Corporations enjoy a “veil” of limited liability, but this can be lifted if a court decides the owner/shareholders are not entitled to corporate protection. Therefore, you need to be asking yourself if you could be personally liable for your business debts and are you taking all the necessary steps to prevent that from happening?

Corporations are legal entities and are separate from the people who own them.The major advantage of forming a corporation is the owners have limited personal liability for company debts. Usually, Corporation owners/shareholders cannot be held personally responsible for business debts. However, courts can ignore the limited liability status of the corporation and hold its officers, directors and shareholders personally liable for its debts. As stated above, this is called “piercing the corporate veil”. Small corporations are at greatest risk for having their veils pierced. “Closely held corporations” – corporations owned by one or just a few people – are most likely to get their veils pierced.

When a corporate veil is pierced, the owners/shareholders can be held personally liable for corporate debts. When this happens, creditors can go after the owner’s home, bank account, investments, and any other assets to satisfy the corporate debt. Therefore, it is critical to understand when a court will pierce the corporate veil.

So, when do courts pierce the corporate veil?

One: there is no true separation between the company and its owners. If the owners fail to maintain formal legal separation between their business and their personal finances, the corporation is just a sham and the owners are personally operating the business as if the corporation didn’t exist. In this situation, the corporation is the “alter ego” of its owner(s).  Examples of this include an owner paying personal bills from the business checking account, ignoring legal formalities that a corporation must follow (such as recording important corporate decisions in the minutes of a meeting), not holding shareholder meetings (even if there is only one shareholder), and generally not acting like a corporation. In these situations, a court could decide that the owners are not entitled to limited liability protection.

Two: fraudulent or wrongful conduct by the company. If the company’s owners acted recklessly or dishonestly, a court could decide that limited liability protection should not apply.

Three: The companies creditors suffered an unjust cost. In the event a corporation is the “alter ego” of its owner, and the company’s actions were wrongful or fraudulent, a court will try to prevent injustice or unfairness by piercing the corporate veil.

Factors courts consider when piercing the corporate veil include:

One: whether the corporation engaged in fraudulent behavior.

Two: whether the corporation failed to follow corporate formalities.

Three: whether the corporation was adequately capitalized and had enough funds to operate.

Four: whether one person or small group of people were in complete control of the corporation.

Again, small corporations are particularly vulnerable to piercing. Owner operators need to be particularly concerned about this. Even though you are the sole owner and shareholder of the corporation, you still need to follow corporate formalities. Specifically, you need to hold annual meetings of directors and shareholders, keep accurate and detailed records of important decisions, adopt company bylaws, and abide by those bylaws.

Do not commingle assets. The corporation should maintain its own bank account and the owner should never use the company account to pay for personal expenses.

You can protect yourself against a court piercing your corporate veil by:

Following the rules for forming and maintaining a corporation.

Maintaining a separate bank account for the corporation.

Do not use corporate assets for personal use.

Making a reasonable initial investment in the corporation.

Do not personally guarantee corporate debts.

Do not use the corporation for illegal, fraudulent or reckless acts.

Do not commingle personal assets with corporate assets.

Letting the world to know they are dealing with a corporation. Put “inc.” On business cards, letterhead, invoices, email, etc. when signing company documents, make it clear you’re doing so in your representative capacity; e.g.: president, vice president, secretary, etc.

Transportation attorneys regularly helps trucking companies, from large carriers to owner operators, with all corporate matters. We are happy to set your corporation up, and advise you on issues regarding corporate governance and best practices for your corporation. No matter how big or how small your business is, if you are in trucking, you should be incorporated!

Contact today!

The real value of arbitraion agreements for trucking companies.

by gspencermynko

Every, and I mean every, trucking company should have a mandatory arbitration clause in any employment or independent contractor agreement they use.

Arbitration is designed to be an informal and quick process for businesses to resolve disputes. However, when utilized against a weaker party, like an employee driver or owner operator, an arbitration clause is a weapon that can defeat even valid claims.

There are many reasons that an individual is disadvantaged by arbitration:

One. High costs: A claimant usually has to pay anywhere from $3000-$6000 upfront just to initiate a case. This is obviously much greater than filing a claim in civil court or small claims, and there is no such thing as a fee waiver due to inability to pay. This hurdle in and of itself will force many potential litigants to drop their cases.

Two. Less exposure. In the event that you actually do end up in an arbitration proceeding, realize that comparison studies of awards by arbitrators and courts have shown that arbitration claimants may only receive 20% of what they would have received in court. Furthermore, the scope of discovery in arbitration can be severely restricted which will limit the ability of the claimant to obtain necessary evidence. Finally, arbitrators do not have the power to enforce subpoenas, which then forces the claimant to file a lawsuit to get compliance.

Three. Prohibition of class-action lawsuits. An arbitration clause can be drafted to prohibit participation in a class-action lawsuit.

Four. Choice of venue clause. An arbitration clause can be drafted with a venue clause that requires arbitration to take place in a location convenient for you and your company.

Five. One-way requirement. An arbitration clause can be drafted to only require the employee or owner operator to arbitrate their claims, while preserving the right for you and your company to sue in court.

Six. No public record. Arbitrations are private and confidential proceedings unlike a court trial, which is public. Furthermore, there’s no court reporter present during an arbitration proceeding, and therefore no verbatim record. Finally, there is no publicly accessible website where people can go to learn of the dispute or its outcome.

Seven. Limited remedies and rights of appeal.  Punitive damages and injunctive relief are generally not available through arbitration.  Generally, arbitration is binding and the claimant has practically no right of appeal. Only in extremely limited circumstances can a claimant appeal an arbitration decision. I must stress that a court intervening and overturning an arbitrator’s decision is an extremely rare event.

Consider this recent example that I had the pleasure of dealing with at our firm.  Our client, a local trucking company, was being sued in small claims court for various damages, including back wages, by an owner operator. As a lawyer, I was not able to represent this client in small claims court, however, I did advise them on how to handle the situation.  I advised the employee representative to point out to the judge the arbitration clause in the contract Transportation Attorneys drafted, and which the claimant clearly signed.  The case was dismissed because the claimant had to proceed through arbitration and our client has not heard from the claimant again.

This is one example of many as to how Transportation Attorneys can protect your company from various claims and lawsuits. Call us or visit us at today!

G. Spencer Mynko, Esq.
Attorney at Law
8311 Haven Avenue
Suite 220
Rancho Cucamonga, CA  91730
t: 909-480-3127
f: 800-709-7051