Establishing or closing a corporation in the US involves a lot less formality compared to other civilized nations in the world. This brings a natural threat: there are so many companies that are easily established and closed within a limited time span for the sole purpose of deceiving potential business partners, customers or vendors. One mutual theme in all these corporations is that they usually have a very well designed website, but they do not even have an office space or any employees. Companies established with the intent to deceive potential business partners are called “Shell Companies”.
According to the regulations, if an invoice is issued to a corporation, payment of that invoice (or any other liability) would be the corporation’s responsibility. The collection of this debt and any other liabilities can only be requested from this corporation, and owners are not responsible since the corporation has a separate entity, which prevents owner’s legal and financial responsibility vis-à-vis contracts executed by the corporation.
There is an exception to this rule when the corporation is a shell company established solely to deceive others and evade the personal responsibility of the owner. This process is called piercing the corporate veil, which is a legal decision to treat the rights or liabilities of a corporation as the rights or liabilities of its shareholders. In order to pierce the corporate veil, the court would need to see proof that the business was established just as a formality and that the corporation neglected corporate formalities such as voting major corporate actions or failing to hold corporate meetings. Piercing the corporate veil has been successfully applied in small, privately held companies where a separate entity from its shareholders would result in fraud or an inequitable result.
Think about a person presenting himself to be the owner a single successful corporation, where in fact he owns one or more Shell Companies to take advantage of the corporate entity. All of the Shell Companies are actually owned by the same person, who transfers money from one company to another to avoid legal liability. This seems to be a potential successful piercing the corporate veil scenario.
We highly recommend consulting with an attorney who could conduct due diligence about the company you would like to do business with to avoid shell corporations. This is a very cost effective way to do business and to prevent future costly litigation.