Question

Sarah owns half of Smith Realty, Inc., and her brother Bill owns the other half. Sarah routinely uses the company car, which is supposed to be used only for taking clients to view property, not to run her personal errands. She also routinely uses company funds for personal uses, but always pays the money back in to the corporation. When Smith Realty failed to pay its lawyer for work completed on its behalf, the lawyer sued Smith Realty as well as Sarah and Bill personally. In this situation the court likely will: a. not pierce the corporate veil, because there was no commingling of interests. b. not allow Sarah and John to be sued individually, because Smith Realty is a close corporation. c. pierce the corporate veil due to Sarah's comingling of interests. d. dismiss the case, because Smith Realty is a close corporation.

Answer 1

Answer:

(c) pierce the corporate veil due to Sarah's commingling of interests

Explanation:

Commingling of interests usually occurs when an investment manager or realtor combines client money with their own or their firm's, in violation of a contract. This can occur in legal cases, corporate client accounts and real estate transactions. For example in this case Sarah has violated her rights as a realtor by routinely using their company funds for her own personal uses.

Answer 2

Answer:

C) pierce the corporate veil due to Sarah's commingling of interests.

Explanation:

Smith Realty Inc. is a closed corporation since its only shareholders are Sarah and Bill. The corporate veil is a legal principle that separates the actions of the corporation from the actions of its owners, both Sarah and Bill. Piercing the corporate veil means that the limited liability protection that Sarah and Bill had as stockholders will be eliminated. That means that the corporation and the stockholders will be treated as one same entity, something similar to a partnership.

A court might decide to pierce the corporate veil in Sarah's case, it will be very difficult to to sue Bill for Sarah's wrongdoings. The lawyer can claim that Sarah commingled her own interests with the interests of the corporation because she used the corporation's assets for her own personal use, therefore she can be considered a single entity with it. In this case, commingling means to mix the shareholder's interest with the corporation's interests.