In Massachusetts businesses can be operated as personal enterprises or as a business entity offering individual liability protection through incorporation. Massachusetts recognizes a number of business formations including a Sub Chapter S Corporation where an individual files the appropriate papers with the Secretary of State and incorporates. The state also allows one to operate a business as a Limited Liability Company also known as an LLC. Again a fee and papers must be filed with the Secretary of State’s office in order to be granted the protection that is afforded to individuals who operate their business as a corporation.
The filing of the incorporation papers alone with the Secretary of State and paying the filing fee is where most individuals stop in their efforts to incorporate. This single mistake can have disastrous effects if the business is later sued in its business dealings. Massachusetts Courts will allow a party to “pierce the corporate veil”; if the corporation is not able to prove that it was run with the requisite formality necessary to give the individuals the liability protection of incorporation. The Court takes into account several factors when determining if it will set aside the corporate protection afforded to the individual who incorporated the business. If the corporate veil is pierced, then individual liability for the corporate actions can attach to the individual subjecting his or her personal assets to satisfy any judgment that may be rendered against the corporation.
The Court in the case of Pepsi-Cola Metropolitan Inc. v. Checkers, Inc. (1985) has recognized 12 factors in assessing whether to pierce the corporate veil and impose liability on an individual for corporate obligations. The failure of the individuals to do more than just file the papers for incorporation is one of the factors that it will use to decide if individual liability will attach. Making sure that the corporation is not running afoul of the factors that the Court will consider in its determination of whether to allow the piercing of the corporate veil and subject an individual to personal liability is a critical measure that must be undertaken to steer clear of trouble and maintain the corporate protection.
Therefore, it is critically important that all of the steps necessary to correctly incorporate are completed. It is imperative that annual filings and procedures that need to be completed are done, to ensure that the corporation remains in good standing. Finally, operating the business with the 12 factors in mind to maintain corporate protection for the individuals in the event a claim or lawsuit is brought against the business is ultimately the goal of the client and counsel when considering incorporation and the protection of individual assets.