Mythbusters? Does the “Corporate Veil” Really Work to Protect Your Personal Assets?
One of the primary factors that attract many small business owners to form limited liability companies (“LLCs”) or corporations is the promise of protection of their personal assets in the event that the business incurs liabilities due to negligence or creditor claims. This protection for the business owner’s personal assets is called the protection of a “corporate veil.” But, just as “veils” conjure up images of sheer and porous fabric, the corporate veil can allow liabilities to pierce the veil if individual business owners do not take proper precautions and use the right strategies in order to make sure that they are protected by the corporate veil.
If you are a business owner and you are doing business through a limited liability company or a corporation, there are some things you can do to make it more difficult to pierce the corporate veil.
Corporation and LLC Asset Protection Background
Corporations and LLCs are statute-created business entities, meaning they are formed pursuant to the laws of individual states, and each state has certain formalities that must be followed in order to form an entity. Corporations and LLCs are distinct entities, separate from the people—the owners—who comprise them. For this reason, the owners are not held personally liable for the business debts . . . unless a court decides to “pierce the corporate veil.” “Piercing the corporate veil” involves the court disregarding the entity’s separate status and holding its owners liable for the business debts, putting the owner’s personal property on the line.
Bottom line: when the veil is pierced, you can lose personal assets (your home, car, bank accounts, or more), even if you did nothing wrong. This is riskier in the event of multi-member LLCs, corporations with multiple shareholders, and loosely formed partnerships where owners might find themselves not just liable for their own actions, but the actions of other owners of the business.
WARNING: The smaller and more closely held the business, the more intensely the court will scrutinize it. Small business owners are less likely to follow corporate formalities and therefore, it is more likely that a court would pierce the corporate veil when small businesses are involved versus large, more structured companies.
How to Make the Corporate Veil a Shield
Corporations and LLCs are excellent business entity choices for protecting the owner’s personal assets from creditors; however, the protection is only as good as the commitment to properly operate the business. Here are some specific business practices you should consider implementing if you have not already done so:
- Follow state formalities.
- Keep business funds in separate bank accounts from personal funds.
- Execute all documents on behalf of the company on behalf of the company and not in your individual name.
- Follow the corporate bylaws or LLC operating agreement.
- Review bylaws and/or operating agreements to insure that the agreements reflect current operations of the company.
- Make sure the business is adequately capitalized.
- Insure that the company complies with state laws applicable rules, etc.
This upkeep is essential to maximizing the protection the corporation or LLC provides to its owners. It is always important not to rely solely upon the corporate veil to protect the company’s assets and the assets of the individual owners. Proper insurance is always the first line of defense.
How We Can Help
We are here to help your business meet all of the formal statutory requirements to protect your corporate veil and offer additional guidance. With our expertise and experience, you can leave the compliance headaches to us and focus on what matters most to you--growing your business.