Wayfair Decision - Pennsylvania CPA JOURNAL - more
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Pennsylvania
CPA JOURNAL Fall 2018 | Volume 89, Number 3
Wayfair Decision
Paves Way for States to Gain
Revenue from Online Sources
more …
Pennsylvania Governor’s Race
Personalize Your Retirement
Value of Angel Investors
Litigation Support
Corporate Form Will Not Protect Owners from All Liability
By L. Erik Ringoen, CPA, CFF, CIRA
S
imon Mainwaring, a social media concept whereby a court will hold owners exceptions to corporate protections, most-
specialist and author, has said, personally liable for the debts or actions ly related to bad actions by owners. Each
“Executives can no longer hide of their company. Pennsylvania law has case has its own unique facts and circum-
behind the corporate veil. They need to a strong presumption against this, but stances. The Pennsylvania Supreme Court
be accountable for what their companies the combination of a good litigator and case of Lumax Industries Inc. v. Aultman
do, because entities are responsible for so- forensic accountant may uncover factors considered these factors: undercapital-
cially irresponsible behavior.” This quote’s that courts have relied on in their decision ization, failure to adhere to corporate
underlying message is pertinent to this to pierce the corporate veil. formalities, substantial intermingling of
column. An action, or lack of action, by a Properly registered and operated corporate and personal affairs, and use
corporation or limited liability company corporations and LLCs can exist indepen- of corporate form to perpetrate fraud.
(LLC) could make its owners liable for dent of shareholders and members, who Just as in other litigation, a forensic
the obligations of that company, and I will are not personally liable for the obliga- accountant will work closely with counsel
discuss some of the concepts and issues tions of the company. Therefore, piercing to understand the legal concepts of the
that could lead to such liability exposure. the corporate veil would be an exception matter and, at the same time, delve into
“Piercing the corporate veil” is a legal to this general rule. Courts have limited the details of the corporate records. This
2018 is a pivotal
election year.
When you ask our state’s aspiring policymakers if they have
your interests in mind, what will they say?
Contribute now to the only political action committee to
specifically represent the interests of Pennsylvania CPAs.
www.picpa.org/cpapac
9578/18
16 Pennsylvania CPA Journal | Fall 2018 | www.picpa.org Click for a podcast with the author.
may mean getting down to examining the Perpetration of Fraud assets with those of business; if
debit and credit entries of certain transac- The investigative work of the forensic they do, record the separation as
tions, which can make all the difference. accountant can provide the information such.
and records needed to show how one or • Refrain from using corporate assets
Undercapitalization more transactions may have resulted in for personal use.
The forensic accountant needs to under- wrongful or inequitable consequences. The • Adequately capitalize the company.
stand how the company was capitalized causal connection between the abuse of • Use full company legal name on all
during specific times, such as at incorpo- the corporate form as mentioned above business communications.
ration or when the company contracted and the wrongful conduct for which relief • File separate income tax returns.
with the other litigant. They should exam- is sought must also be established. • Sign company documents in your
ine accounting and financial records, such representative capacity.
as the balance sheet, income statements, Protecting Against Veil Piercing Business owners should run their com-
statement of cash flows, trial balance, It takes more than the filing of incorpora- panies with good sense and good inten-
and general ledgers, along with relevant tion paperwork to limit liability. Business tions. This will help reduce the possibility
supporting documentation. This analysis owners need to be organized, keep good of losing or impairing the limitations on
seeks to understand the debt and equity of records, maintain proper accounting, personal liability, a primary reason for
the subject company’s capital structure to implement good internal controls, and forming a corporation. Should the need
determine whether the company deliber- follow corporate formalities. CPAs can arise, an experienced forensic accountant
ately undercapitalized to avoid a debt. help create a better delineation between can help assist in gathering evidence to
the company and its owners by advising assist the trier of fact understand the
Organizational Formalities clients to do the following: manner in which the subject company or
Relevant data needs to be examined to • Maintain accurate and complete companies operated.
determine the actual structure and for- books and records.
malities of the company. As an example, • Hold annual board meetings and L. Erik Ringoen, CPA, CFF, CIRA, is
bylaws and amendments provide the com- keep accurate minutes. a director with Forensic Resolutions Inc.,
pany’s board of directors and management • Maintain separate bank accounts for which has offices in Westmont, N.J.,
with guidelines for the operation of the the company. and Philadelphia. He can be reached at
business, such as schedule of board meet- • Refrain from commingling personal eringoen@forensicresolutions.com.
ings, officers/directors elections, and the
keeping of minutes. A company’s failure
to run the business on a day-to-day basis
in accordance with its bylaws, ignoring
corporate structure, has been a factor con-
sidered by courts when deciding whether
or not to pierce the corporate veil.
Intermingling of Assets
To support or refute the abuse of the cor-
porate form for the personal interest of its
owners or the commingling of corporate
assets with personal funds, the forensic
accountant should examine bank and
brokerage account statements, canceled
checks, or other documents that identify
payee, amount, and proof of payment to
identify any commingling. In addition,
determining how the company records
these payments on the general ledger,
or if they record them, is critical. Is it a
business or personal expense? A loan? A
third-party payment? Is there an account-
ing acknowledgement of the separateness
of the transaction? What are the account-
ing entries for a particular transaction and
how is that viewed against the veil-pierc-
ing criteria listed above? These documents
can provide information related to the
commingling or use of corporate funds to
pay personal expenses of the owners.
Pennsylvania CPA Journal | Fall 2018 | www.picpa.org
17You can also read
