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Why You Need to Keep Separate Businesses Separate
In the business world, it’s not uncommon for people to own stakes in multiple enterprises and take on various roles in different companies. This doesn’t often cause problems, but it can. When the lines between companies, roles, and interests are blurred, it can lead to a determination of amalgamation, which can be used to pierce the corporate veil and end an individual’s liability protection.
Amalgamation as a Way to Pierce the Corporate Veil (PCV)
The “corporate veil” is a metaphorical term for the liability protection covering owners and managers of certain business entities like corporations and limited liability companies. Piercing the corporate veil, then, refers to when the court removes that liability protection, making managers and owners liable for the company’s debts and more. (Learn more about piercing the corporate veil here on this blog.)
One way South Carolina courts can PCV is through demonstrating amalgamation. A 1986 South Carolina Court of Appeals case, Kincaid v. Land Dev. Corp., first addressed the “amalgamation of interests” theory, but it was only last year, 2018, that the South Carolina Supreme Court recognized amalgamation as a way to PCV, in the case Pertuis v. Front Roe Restaurants, Inc. (Read more about Pertuis here on this blog.)
Amalgamation is also called the “single business enterprise theory” because it has to do with multiple businesses acting as one. Essentially, when multiple businesses operate as if a single business, they may be treated by the court as a single business, rather than distinct businesses.
What Amalgamation Is and What It Requires
In Pertuis, the South Carolina Supreme Court stated “where multiple corporations have unified their business operations and resources to achieve a common business purpose and where adherence to the fiction of separate corporate identities would defeat justice, courts have refused to recognize the corporations’ separateness […]”
So there are two parts to determining amalgamation:
- Multiple corporations must have unified their operations and resources to achieve a common purpose, and
- Justice would be defeated if the corporations continued to be treated as if separate
To this second point, the Supreme Court said that intertwined operations aren’t enough to show amalgamation, requiring “further evidence of bad faith, abuse, wrongdoing, or injustice resulting from the blurring of the entities’ legal distinctions.”
The Supreme Court, importantly, also stated “we acknowledge that corporations are often formed for the purpose of shielding shareholders from individual liability; there is nothing remotely nefarious in doing that.”
Case in Point
A recent Court of Appeals case also looked at this issue of amalgamation, in Stoneledge at Lake Keowee v. IMK Development. (You can find the full PDF of the Court’s opinion here.)
Briefly, the HOA of a development in Oconee County sued Marick, Integrys Keowee, IMK, and other parties over defects causing leaks in the development’s townhomes. Marick, a construction company, and Richard Thoennes, one of its principals, appealed.
Among many other issues, Marick and Thoennes appealed the trial court’s finding that Marick, Integrys Keowee, and IMK were amalgamated, arguing they were distinct and separate entities.
The Court of Appeals affirmed the trial court’s decision. Here is just some of the testimony the Court cites as evidence of amalgamation between the three:
- They were “corporately affiliated” under the umbrella of IMK
- They passed corporate funds directly between one another
- They allowed individual members to operate as dual agents without distinction as to which business they represented at any given time
- IMK was created to hold title to Stoneledge project, Marick was to do construction, and Integrys Keowee was to provide the investment, and then split the profits
- Thoennes knew about the defects that (in the Court’s words) “plagued the project,” but was still involved with IMK and Marick’s marketing and sales, demonstrating “their operations were clearly in pursuit of a common business purpose, albeit to the detriment of the HOA members.”
The Court found “evidence of a unified operation” between the parties “as well as evidence of self-dealing,” satisfying both parts required to show amalgamation.
How You Can Avoid PCV Through Amalgamation
Refer to the post on this blog about PCV for what you can do to help maintain the liability protection your company offers you.
If you have other questions about liability protection, amalgamation, PCV, or business law, contact the Gem McDowell Law Group in Mt. Pleasant, SC. Gem and his associatess can help you navigate business law, which can be complex. Call today to schedule an initial consultation at 843-284-1021.