Massachusetts Business Attorney · Business Law
Forming an LLC or corporation puts a legal wall between your business debts and your home, savings and other personal assets. But that wall isn’t guaranteed. In the right circumstances, a Massachusetts court can “pierce the corporate veil” and hold the owners personally liable.
When Massachusetts courts pierce the veil
Massachusetts courts don’t disregard a company lightly. They look at a set of factors, including:
- whether the owner exercised pervasive control over the company
- whether business and personal funds were mixed together
- whether the company was thinly capitalized for the risks it took on
- whether corporate formalities and records were ignored
- whether money was siphoned out to the owners
- whether the company was used to commit fraud or avoid obligations
No single factor decides it, and courts weigh the factors rather than count them. Control alone isn’t enough: Massachusetts courts look for an owner who used the company for an improper purpose, such as fraud or dodging its obligations, in a way that harmed someone dealing with it. That’s why courts pierce the veil only in “rare situations.” Federal courts applying Massachusetts law use the same test for LLCs.
Six habits that keep your protection in place
- Keep money separate. Use a dedicated business bank account and credit card. Never pay personal bills from the business account, or the reverse.
- Sign as the company. Sign contracts as “Jane Smith, Manager, Smith Landscaping LLC,” not just “Jane Smith.”
- Capitalize and insure realistically. Keep enough money and insurance in the company to cover the risks it actually takes on.
- Keep the company current. File your annual report on time and keep an up-to-date operating agreement or bylaws.
- Document big decisions. Write down loans between you and the company in your corporate book, major purchases, and distributions to owners.
- Watch for personal guarantees. Banks and landlords often ask owners to guarantee company debts personally. Know what you’re signing, and negotiate limits where you can.
Protection starts at formation
Our earlier article on sidestepping liability when starting a new business explains how choosing the right structure limits your exposure from day one. If you’re unsure whether your company’s habits would hold up in court, contact our office for a review.
About the Author
Richard Alan Gaudet, Esq. is a Massachusetts attorney at the Law Offices of Richard Alan Gaudet, LLC in Middleton, Massachusetts, who advises clients on business formation, liability protection and business litigation. His practice focuses on professional license defense, business law and litigation, family law, and landlord representation, serving clients across Northern, Eastern, and Central Massachusetts. Reach him at 978-273-8337 or rgaudet@gaudetlawoffice.com. Office: 35 Village Rd., Ste 100, Middleton, MA 01949.
ABOUT THIS ARTICLE
This article was prepared by a Massachusetts attorney and is provided solely for general informational and educational purposes directed to members of the general public. It does not constitute legal advice and does not create an attorney-client relationship. The law applicable to any particular situation depends on the specific facts and circumstances of that matter. Readers are encouraged to seek the advice of a licensed Massachusetts attorney before taking any action.
