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legal business entities

Intermingling of Funds: Part 2 in The Proper Use of Legal Business Entities series

June 20, 2019 by Robert A. Burke, Esq.

intermingling-funds_c Shirley Hu dreamstimefree_8092864

By Robert A. Burke, Esquire-

In this article, we will address how the intermingling of funds will expose your personal assets and how to avoid this exposure.

Intermingling of Funds

The intermingling of funds among the entities must be “substantial.” [efn_note] Lumax, at 669 A.2d at 895 [/efn_note]

Transfers of money between entities is not, in and of itself, evidence of substantial intermingling of corporate and personal affairs.  A company’s recording of transfers between entities is direct evidence that there was no intermingling of corporate and personal affairs and undercuts an alter ego theory.

The Courts recognize that the corporate veil will not be pierced in Pennsylvania absent specific and unusual circumstances. [efn_note] Lumax Industries, Inc., 669 A.2d at 895-96 [/efn_note]   The Courts recognize the importance and “sanctity of the corporate structure in Pennsylvania.” [efn_note] Id. at 895 [/efn_note] Therefore, it is not enough for there to be a charge of inadvertent exchange of funds between the members of the limited liability company and the entity.  Rather, the Plaintiff must meet its burden and show “substantial intermingling of corporate and personal affairs and use of the corporate form to perpetrate a fraud.” [efn_note] Id. at 895 (emphasis supplied) [/efn_note] ; [efn_note] see also Kaites v. Department of Environmental Resources, 529 A.2d 1148, 1151 (Pa. Cmwlth. 1987) [/efn_note]

Forming a Separate Legal Entity

The main purpose of forming a separate legal entity to operate a business is the protection of personal assets. It is imperative that you consult with your attorneys to assure the proper formation and use of the corporate form to protect your personal assets.

The commonality of ownership is not evidence that supports a piercing of the corporate veil.  “Control through the ownership of shares does not fuse the corporations, even when the directors are common to each.” [efn_note] United States v. Best Foods, 524 U.S. 51, 69 (1998) [/efn_note] Common ownership and control is not evidence of piercing the corporate veil.  It is the “general presumption” that “directors and officers holding positions with a parent and its subsidiary can and do ‘change hats’ to represent the two corporations separately, despite their common ownership.

Accordingly, the owners of the corporation provided capital by way of a loan to the corporation.

The Court reasoned as follows: 

[Plaintiff argues that the corporation] was undercapitalized, as evidenced by its failure to pay income distributions, as well as its need to take out a mortgage on the property and to receive advanced funding from [the owners] to complete construction of the hotel.  These facts are insufficient to support veil piercing: [the corporation’s] failure to pay income distributions is evidence not of undercapitalization, but of underperformance, and it is patently absurd to suggest that the need to borrow money – – especially at the beginning of a project – – proves, on its own, that a company is undercapitalized.  Indeed, that conclusion would, presumably, expose nearly every company to the possibility of veil piercing. [efn_note] Id. at 12 (emphasis in original and emphasis added) [/efn_note]

The Court made much of the fact that the company filed tax returns, had officers, titled assets in its name and kept books and records were all indicia of adhering to corporate formalities.  The Court rejected Plaintiff’s claim that transfers between the owners and the corporation were evidence of intermingling of funds.  The Court opined that these transfers did not rise to the level of “substantial intermingling of corporate and personal affairs.”  “To the contrary, the fact that these transfers were memorialized in the company’s’ records, rather than undocumented, undercuts an alter ego theory.”  [efn_note] Id. at *13 [/efn_note]

As this is an exceptionally complicated area of the law, it is imperative that you consult with your attorneys to assure the proper formation and use of the corporate form in order to protect your personal assets. See Part 1 in the article series “How Your Personal Assets Can Be Exposed”.


Robert A. Burke, Litigation Attorney

Robert A. Burke is a partner in the law firm of MacElree Harvey, Ltd.  He handles complex commercial and estate litigation matters.

To schedule a consultation, call (610) 840-0211 or email [email protected].

Filed Under: Articles by Our Attorneys Tagged With: Intermingling of Funds, legal business entities, litigation, Robert A. Burke

The Proper Use of Legal Business Entities: How to Protect Your Personal Assets

December 10, 2018 by Robert A. Burke, Esq.

personal assets

The main purpose of forming a separate legal entity to operate a business is the protection of personal assets.  This multi-part series of articles will discuss in detail the proper use of the corporate form.  These articles will hopefully help you avoid common mistakes that could expose your personal and family assets.

Part One

Overview – How Your Personal Assets Can Be Exposed

So long as your business follows the correct procedures, and avoids the pitfalls that will be discussed below, the courts will uphold the corporate form.  Your personal assets will be exposed to creditors of your business where there is what’s referred to as a “piercing of the corporate veil”.

Your business entity is protected if you have a corporation or an LLC.  Pennsylvania’s Corporations and Unincorporated Associations Act, 15 Pa.C.S. § 8900, et seq., provides that limited liability companies are treated in the same manner as corporations.  In this respect, the members of the limited liability company (just like shareholders of a corporation) are not liable for the debt or obligation of the entity, absent extraordinary circumstances.  15 Pa. C.S. § 8904 (b) and comment b.

In order to surpass the strong presumption in Pennsylvania against piercing the corporate veil, a plaintiff or creditor of your business must try to prove the following:

  • The company was undercapitalized at the time of the incident or debt;
  • The company failed to adhere to required corporate formalities;
  • There was a substantial intermingling of corporate and personal affairs between the company and the owners of the company; and
  • The owners of the company used the corporate form to perpetrate a fraud.

These are known as the Lumax factors, from the seminal 1995 Pennsylvania Supreme Court case, Lumax Industries, Inc. v. Aultman. [1]  These factors will all be considered and will be weighed differently, on a case-by-case basis.

In Pennsylvania, piercing the corporate veil is permitted in extraordinary circumstances to get at the assets of the owners of the entity.  There is a strong presumption in Pennsylvania against piercing the corporate veil.  In applying the Lumax factors to determine whether the corporate veil should be pierced, the Court must start from the general rule that the corporate entity should be recognized and upheld, unless specific, unusual circumstances call for an exception.  “Care should be taken on all occasions to avoid making the entire theory of corporate entity … useless.”[2]

A Court should pierce the corporate veil only when the corporation was an artifice and a sham to execute illegitimate purposes [and] abuse of the corporation fiction and immunity that it carries.

Part two of this series will address how the intermingling of funds will expose your personal assets and how to avoid that.

As this is an exceptionally complicated area of the law, it is imperative that you consult with your attorneys to assure the proper formation and use of the corporate form in order to protect your personal assets.


Robert Burke

Robert A. Burke is a partner in the law firm of MacElree Harvey, Ltd.  He handles complex commercial and estate litigation matters.

To schedule a consultation, call (610) 840-0211 or email [email protected].

[1] Lumax Industries, Inc. v. Aultman, 669 A.2d 893, 895 (Pa. 1995) (emphasis supplied).

[2] Zubik v. Zubik, 384 F.2d 267, 273 (3d Cir. 1967)

Filed Under: Articles by Our Attorneys Tagged With: asset protection, legal business entities, litigation, personal assets

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