How to Avoid Piercing the Corporate Veil?
If you have ever indulged in any legal matters around you, you might have come across the phrase “piercing the corporate veil.” This phrase defines how the owners can easily lose the benefits of the limited liability that they have achieved by opening their company as a corporation or LLC.
Usually, when this happens, the personal assets of the owner is then used to cover the liabilities and debts of the business. However, this concept isn’t only for the corporations, and it can happen to any type of business entity that offers limited liability to the owners. These owners will be at risk if the owners do not take any crucial steps to make sure that the corporate veil protection stays intact.
Guarding your Assets
The limited liability companies (LLCs) and corporations endure independently from their owners, and this is where the owner’s assets are different from the business assets. One reason why you are seemingly envisioning forming an LLC or incorporating your business is so that the corporate veil protection that these business types render, protects your personal assets.
However, this protection is not something that is guaranteed to remain without you making any efforts to keep it. And that is why there are responsibilities that come along with it.
How to Avoid Piercing the Corporate Veil & Maintaining Personal Asset Protection?
The owners of LLCs and Corporations need to take some steps for their business to exist independently from them. The main steps have been shared below:
- Working on Essential Formalities: Each corporation has stern requirements that have to be followed. And even though the LLCs do not have the same formalities, a lot of the steps are the same and are advisable so they can avoid piercing the corporate veil.
LLCs: Tackle and complete any of the annual filings of the incorporation promptly and even pay the required fees that are needed by the state. By recommended formalities, we mean the tasks like holding both annual and initial meetings of the members and also the managers, if your LLC is manager-managed, keeping a membership transfer ledger, issuing membership certificates to owners, regularly updating an operating agreement, and even creating the operating agreement in the initial stages.
Corporations: Under the corporation rules, there are a lot of things that have to be taken care that includes; to develop the bylaws, regularly update the bylaws, pay corporate taxes, pay the necessary filing fees, and even complete any annual filings needed by the state in which your company is incorporated in on time. Other than this, it is vital to hold both annual and initial meetings of both shareholders and directors, maintain a stock transfer ledger, and issue shares of stock to owners (shareholders).
- Ensure adequate business capitalization: It is obvious that your company would need the money, equipment, and items that are necessary to both incorporate the business and also to run it with the corporate veil protection. Other than this, there are many other ways to make this work: like with your own money, via a business loan, accepting the cash from others and then turning those people to business owners.
Whatever your approach, it is known that for if your business is to survive, you would need an adequate an amount of capital. It should be kept in mind that the capital must be designated to grow the company and not for your personal use.
- Make the LLC or corporate status known: Design the business cards for displaying the name of the LLC or Corporation. Ensure that the invoices created for your business activities or those you send to your clients are in the company’s name. Moreover, the contracts, documents, and/or leases that you sign on should have the company’s name and not yours to avoid piercing the corporate veil.
- Do not combine the personal and business assets: Keeping the personal assets and the business assets separate is vital. Get a business credit card and a business checking account that would be used for the business expenses only. Another thing is that you should keep the assets like property and equipment separate.
- Documenting your business actions: Record all the important meetings you hold as well as the significant business decisions. Let us take for instance; keep and sign the contract that your organization enters. Also, keep the records of the initial and the annual meetings that have been held by the shareholders and the directors, or even with the managers/members (LLCs). Record all the minutes of the meeting and keep them. Retain all the formal business documents including those mentioned above for the next seven years.
Note: It has to be remembered that if a judge cannot be able to differentiate between the things that the owner has and those assets that are for the business; where the owner does not have the right proof of the formalities that have been complied with, it would be regarded as though you are acting as a general partnership or a sole proprietorship, instead of an LLC or corporation. And this is where you are not able to avoid piercing the corporate veil.
In short, the judge would then “pierce the corporate veil” and grant your personal assets to the plaintiff who got you there.