Piercing The Corporate Veil of Affiliated Companies
Companies which engage in more than one line of business frequently form several related entities in an attempt to insulate each of their lines of businesses from the debts and liabilities of the others. These may be parent andsubsidiary or entities with overlapping ownership. However, where there is little to differentiate between the entities other than separate incorporation, the courts will look behind the corporate formalities to hold one corporation liable for the debts of an affiliated company.
In Smith v. McLeod Distributing, Inc., 744 N.E.2d 459 (Ind. App. 2000) the trial court pierced the corporate veil to hold Colonial Mat Company liable for the debts of its affiliate, Colonial Industrial. In affirming the trial court's findings, the Court of Appeals of Indiana noted thatthe following factors may be considered when determining whether the corporateveil should be pierced:
- the capitalization of the companies,
- an absence of corporate records;
- was there a commingling of assets and affairs,
- were similar corporate names used,
- did the companies have common principal corporate officers, directors and employees,
- were the companies located in the same office and did they use the same telephone numbers and/or business cards; and
- were the companies otherwise operated as separate entities or were manipulated or controlled as one enterprise through their interrelationships to cause illegality, fraud or injustice or to permit one economic entity to escape liability arising out of an operation conducted by one corporation for the benefit of the whole enterprise.
In holding Colonial Mat liable for the debts of Colonial Industrial, the court noted that the companies had similar names, were engaged in virtually identical lines of business, had the same directors and the same president, shared the same office manager, operated at the same address and used the same phone number, had intermingled their assets, and that Colonial Mat had paid for obligations of Colonial Industrial.
The Indiana decision underscores the need for affiliated companies to observe the corporate formalities. A failure to do so could result in a loss of the limited liability afforded by establishing separate entities.
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