How to Avoid Piercing The Corporate Veil

How to Avoid Piercing The Corporate Veil

How to Avoid Piercing The Corporate Veil

Often founders are so busy running their companies, they don’t have the time to sit down and follow legal formalities for their business. However, a main reason for incorporating your business or forming a Limited Liability Company (LLC) is for the personal asset protection they provide. However, this protection is not guaranteed.

Corporations and LLCs exist separately from their owners. Nevertheless, the protection provided by having an entity separate from its owners may be lost when there has been a Piercing of the Corporate Veil. This occurs when certain conditions aren’t followed by corporate participants and they therefore lose their protection and limited liability. Essentially, the shield or “veil" is broken and the shareholders become liable for the corporation’s obligations.

These are the three simple actions to keep in order while running your corporation to maintain your limited liability.

1. Observe Corporate Formalities The most common factors that courts mention in piercing the corporate veil is whether the corporate participants have observed corporate formalities. These formalities include:
  • Holding shareholders’ and directors' meetings,
  • issuing of stock,
  • election of directors and officers,
  • passing resolutions authorizing payments,
  • and keeping corporate minutes.

The rationale and attention courts five to corporate formalities care for a few reasons. It is argued that anyone who disregards the corporate form should not be allowed to claim the privilege of limited liability. Second, that the failure to observe formalities may indicate that creditors have been confused or misled about whom they were dealing with. Third, that a lack of formalities suggest shareholders systematically disregarded corporate obligations.

2. Keep your corporate or LLC status known in your dealings Create business cards that display the name of your corporation and LLC. Make purchases and pay invoices via a business checking account or credit card. Create invoices in the company name to send to your clients. Also, any contracts, leases and/or documents you sign should be in the company name.

3. Maintain seperate bank accounts for personal and your company Courts also justify piercing when shareholders fail to keep corporate and personal assets separate. Using a corporate bank account to pay for personal expenses is a sure way to risk a piercing scenario. Similar to maintaining corporate formailites, creditors have a valid expectation that business assets will be availble to meet their claims. Therefore, use a business checking and business credit card only for business expenses.

A court may "pierce the corporate veil" and award your personal assets to any plaintiff if it can't distinguish between what belongs to the business and what belongs to the owner or the owners cannot provide proof that all formalities have been followed.