Chapter 14 - EXHIBIT 14D • PRACTICE TIPS: HOW TO AVOID PIERCING THE VEIL

• Jurisdiction: Colorado

EXHIBIT 14D • PRACTICE TIPS: HOW TO AVOID PIERCING THE VEIL Practice Tips: How to Avoid Piercing the Veil

• The principals should not use the entity to assist the principals in lying, cheating, or stealing. Under the old legal maxim of "bad facts make bad law," courts are more likely to bend over backward and ignore the law where the court believes that equity demands relief.

• Maintain formalities where possible or where required by the operating agreement.

◦ Formalities (minutes, etc.) are required of a corporation.
◦ Formalities are required in an LLC where the operating agreement so states.
◦ Otherwise, the LLC Act specifically states that a failure to observe formalities relating to management "is not in itself a ground for imposing personal liability on members." C.R.S. § 7-80-107(2).

• Have management manage. Both the CBCA and the LLC Act impose certain obligations on the persons designated to manage the entity. Where managerial rights are assumed by non-managers (as in McCallum Family LLC v. Winger, 221 P.3d 69 (Colo. App. 2009)), a court is more likely to be convinced that the form of the entity should be disregarded.

• Provide for financial segregation and do not allow personal use of entity funds.

◦ Even in the case of a single-member LLC, the entity should have its own tax identification number and its own bank accounts that are identified and used for business expenses.
◦ Where entity funds are used for personal expenses, a court is more likely to be convinced that the form of the entity should be disregarded.
◦ Where related entities share lease space or management, appropriate arrangements should be documented and followed.

• Ensure that the entity is adequately...