This article is part of a larger series of articles about how to set up and organize a business both properly and legally. Today, our article is all about the “corporate veil”. Maybe you’ve heard the term before and wondered what that was referring to. The corporate veil is a legal concept that concerns the separation of the actions of a corporation from its individual shareholders. When a shareholder pierces the corporate veil, they are muddying that separation and opening themselves and the company to liability.
So, the corporate veil is a pretty important concept to understand.
One of the big reasons you structure a business as a corporation or LLC is to limit your personal liability when it comes to the decisions of your company, both financial and otherwise. That is the corporate veil. It is the legal structure that guards your personal legal liability against the liability of your company. When creditors find a way around this, they have pierced the corporate veil.
How to Keep the Corporate Veil Strong:
You are running a business. The last thing you need is to be entangled in financial or legal trouble that can be avoided. Here are a few areas you should be aware of to keep your corporate veil intact.
- Don’t Be Fraudulent – You guessed it! The quickest way to pierce the corporate veil is to do clearly illegal stuff on purpose. You should avoid that. This would include things like misrepresenting assets or liabilities to avoid paying a creditor. So to state the obvious, stay above-board with your finances.
- Keep Track of Your Corporate Footprint – The corporate veil can get pierced when a parent company and its subsidiaries are not sufficiently distinct, one from the other. You’ll also need to register in every state in which you operate. If you operate under one or more DBAs, those will all need to be registered with the secretary of state or other appropriate agency.
- Don’t comingle your finances – If you form an LLC, S-Corp, or C-Corp, you can’t use your business account for personal use, or vice versa. That is an excellent way to pierce the corporate veil and put yourself into jeopardy.
- Follow Business Formalities – We touched on this in the last article on annual meetings. It’s not just a nice thing to do. If you fail to do things like hold an annual meeting for shareholders, maintain organizational documents, and other seemingly mundane tasks, you are putting yourself in jeopardy of liability.
- Don’t Undercapitalize – Your protection from liability is not jeopardized when you have a slow quarter or some period of time when the company underperforms expectations and does not make a profit. What will pierce the corporate veil is if your business is seen as being undercapitalized. If you are consistently undercapitalized, without adequate cash flow or access to credit to maintain business operations, that will catch up to you in more ways than one.
State Laws Differ
The specifics of maintaining the corporate veil are not universal. Depending on the state or states where your business is located and incorporated, you will have different considerations when it comes to maintaining the corporate veil.
Building and growing a business can be a powerful wealth-building tool, and running a business can be exciting and rewarding in so many ways. Organizing your business and concepts like the corporate veil are not necessarily the fun parts of doing business, but they are the parts that you need to pay attention to so you can stay in business for the long haul.