Piercing the Corporate Veil: When Can a Subcontractor Go After the Personal Assets of a General Contractor’s Owners?
Even small construction contractors in Florida typically do business as a corporation or limited liability company (LLC) in order to take advantage of limited liability protections. Put simply, the business entity is liable for any debts owed by the business, as opposed to the individual owners or shareholders. Only under limited circumstances will a Florida court “pierce the corporate veil” and hold the individual owners personally liable for a business debt.
A recent court decision from Georgia helps to illustrate the general difficulty parties face when trying to pierce the corporate veil. In this case, G & E Construction, LLC v. Rubicon Construction, Inc., a tile subcontractor sued its general contractor on a series of residential remodeling jobs for nonpayment. The individual who owned the general contractor also hired the subcontractor, via the corporation, to work on his personal residence.
In 2017, the State of Georgia administratively dissolved the general contractor’s corporation. The subcontractor then attempted to sue the individual owner personally. But both a trial court and later the Court of Appeals rejected this effort to pierce the corporate veil, despite the fact the underlying corporation no longer existed.
The subcontractor argued that under Georgia law, an individual can be held personally responsible for “purporting to act” on behalf of a non-existent corporation. That is true, the Court of Appeals noted, but in this case, the corporation did exist prior to dissolution. Even if the individual owner failed to “observe corporate formalities,” that did not negate the existence of the corporation.
The Court of Appeals also said that hiring the general contractor’s decision to hire the subcontractor to work on his personal residence did not justify piercing the corporate veil. The Court noted that the mortgage lender on the residence approved the use of the general contractor as the contractor and that the owner’s personal funds were always kept separate and apart from the corporation’s accounts. Given all this, the Court said there was no cause to hold the former owner personally responsible for failing to pay the subcontractor.
Have You Taken Proper Steps to Protect Yourself from Personal Liability?
In Florida, like Georgia, there is a strong presumption against piercing the corporate veil. Normally a party seeking to hold an individual owner liable needs to show two things: First, that the corporation was the “mere instrumentality” or “alter ego” of the individual owner; and second, that the owner used the corporation in an unfair or dishonest way to commit fraud, mislead creditors, or carry out some other ulterior purpose.
On the other side, if you are looking to maximize your personal liability protection as a contractor or subcontractor, it is important to observe all necessary legal formalities with respect to organizing and maintaining a corporation or LLC. You should always remember that your business and personal assets need to be kept separate to avoid the type of litigation described above.