First, a definition.  Piercing the corporate veil is generally a situation where a shareholder or director of a corporation is held liable for the debts or liabilities of the corporation despite the general principle that shareholders are immune from suits that otherwise would hold only the corporation liable.  Once the corporate veil is pierced and the separate corporate entity is disregarded, the shareholders and directors can face personal liability for obligations of the corporation.

Although the laws are different in each state, generally for the corporate veil to be pierced, there must be evidence that shows the corporation was merely a formality and that the corporation neglected corporate formalities and protocols. Here are some factors that are reviewed when deciding whether corporate formalities have been neglected:

• Absence or inaccuracy of corporate records.
• Non-arm’s length relationships with related parties.
• Failure to observe corporate formalities (such as documentation requirements, board and shareholder meetings, or accounting practices).
• Failure to observe legal formalities (such as annual registrations, payment of annual fees or filing tax returns).
• Intermingling assets of the corporation and the shareholder.
• Illusory corporate officers and/or directors.
• Significant under-capitalization of the business.
• Withdrawing corporate funds by the dominant shareholder.
• Treatment by a shareholder of the assets of corporation as his/her own.
• The use of the corporation as an “alter ego” of a shareholder.

While this is not an exhaustive list of factors a court will look at when deciding whether to pierce the veil of a corporation, and not all of these factors need to be present to pierce the veil, they do give a flavor of the types of activities that should be avoided.

Whether the corporation is large or small, following corporate formalities is extremely important to preserve the liability shield offered by a corporation.  Investing early in the life of a corporation to ensure you have processes and procedures in place for handling routine corporate formalities can payoff significantly over the long term.  So, spend a few minutes in the next week looking at your corporation and determine whether you believe you have risk factors for piercing the corporate veil.  Then, contact an attorney that specialized in corporate law to instruct you on how to properly run your corporation to mitigate any possible risk of piercing the corporate veil.

The basic purpose of a board of directors is to have a group of individuals that are selected by the owners of the company to jointly oversee the activities and business of the company.  This can include governance issues, overseeing senior management, determining strategy, providing advice and direction, setting goals and priorities and other roles based on the needs of the company.

In small and medium sized companies, a strong board of directors can provide mentorship to management, networking opportunities, growth connections and can help build and establish important relationships.  For larger companies, in addition to the previous advantages, a strong board can provide corporate oversight, help manage risk, hold management accountable and provide independence.

Selecting the right members for the board is very important.  Often times, a natural instinct is to add your friends and family or your corporate attorney.  Here is an interesting post on why not to add the company’s attorney.  I tend to agree that it is not the best idea for the corporate attorney to also sit as a director.  I feel the same way with family and friends.  While it is an honor to sit on a board, reserve that honor for someone that can offer advantages to the company.  Challenge yourself to look outside your four walls for directors.  I tend to favor industry experts, local business people, banking or finance experts, marketing experts and/or other people with skills or relationships the company can leverage.  A good board can act as an extension of the company, so when looking at directors, you may want to focus on areas that will benefit the business.  Here is an interesting article on board considerations from the Harvard Law School blog.  Although it is more focused on public company boards, the principals can be applied to any board of directors.

Below are three alternative methods of compensating employees that may offer just the right combination for your business to motivate and score in these tough, but opportunistic times.

Stock Options. At their core, stock options are essentially rights granted by an employer to purchase stock at a stipulated price over a specific time period.  They generally come in two types, Incentive Stock Options and Non-Qualified Stock Options.  Incentive Stock Options are more restrictive because they offer significant tax benefits to the employee.  Stock options are a great tool to provide long term incentives to employees in a growing business with a liquidity event somewhere on the horizon because they allow employees to share in the growth and success of the company as if they were a shareholder.

Restricted Stock. Restricted stock is generally a grant of stock to an employee, with the stock being subject to restrictions as to vesting and transfer.  Restricted stock typically provides strong long term incentives to recipients because they must remain with the company for the stock to vest and have the right to realize the anticipated gain in the value of the stock over time.  Vesting can be tied to the passage of time, the attainment of specified performance metrics or some other measure.  Moreover, recipients tend to feel more connected to the company if they own stock (even if it is restricted and subject to vesting).

Phantom Stock. Phantom stock is a form of compensation based upon the performance of a company’s stock over time.  A recipient is given “Phantom Units” that are not shares of stock, but track with the value of the stock of the company.  The company will typically define time periods and/or performance metrics that must be met for the Phantom Units to vest.  Once the Phantom Units vest, a cash payment is made to the recipient based on the value of the actual stock at that time.  Therefore, Phantom Units are a “parallel universe” to the stock, which track value over time and pay out cash at specified periods.  These programs can be infinitely flexible and recipients receive the upside of being a shareholder without actually owning any stock.  A note of caution for the company, though, as if the stock value increases significantly, these plans can require substantial cash payouts.

As you can see, the basic idea in each of these alternatives is that the business must be successful and grow for these compensation methods to provide value to the employee.  Therefore, in addition to providing monetary gain and retention, they provide a nice incentive for the employees to do what it takes to increase the company’s value.  Of course, care must be taken when evaluating these types of programs as they typically include complicated tax, accounting and legal considerations that must be addressed in each specific instance.  However, in these troubled economic times where employees are being stripped of compensation at every turn, perhaps a small paradigm shift will give your business the edge it needs to excel.