How Well Does the Corporate Veil Protect Your Personal Assets?
After much due diligence, speaking with lawyers and business advisors, you decided that the asset protection afforded by a corporation or limited liability company (LLC) is important to you. You worked through the tax implications for all the different business entities with your CPA and the non-tax implications with your attorney. You took the next step and properly structured your business as a corporation, LLC or other legal entity. All appears well with the world. Not only is your business protected but your personal assets are protected as well via the “corporate veil.” But just what is this “corporate veil.” Does it actually work or when push comes to shove will your personal assets be exposed to any creditor that comes along?
To many, the word “veil” conjures up a sheer, flimsy, ethereal piece of material—perhaps fluttering behind a beautiful bride. And yet, many business owners choose to form a corporation or an LLC specifically for the personal asset protection these entities provide to the business owners. This protection is provided by what is known as the corporate veil. A veil?
Yes, that’s what we call it. And, of course, with the right strategy you can make it much stronger than one worn by a bride.
Here’s what you can do to make your veil puncture proof.
A bit of background.
Corporations and LLCs are statute-created business entities. Courts view a corporation and most LLCs as 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” means the court disregards the entity status to reach the property of its owners.
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.
The smaller and more closely held the business, the more intensely the court will scrutinize it.
What can you do to protect your personal assets?
Corporations and LLCs are excellent business entity choices for protecting the owners’ personal assets from creditors. But the protection is only as good as the commitment to operate the entity as a proper business entity. Here are some specific ways to do this.
- Uphold all statute-mandated formalities
- Keep business funds separate from personal funds
- Always use the business’s full legal name and sign all documents in your formal capacity
- Uphold the corporate bylaws or LLC operating agreement and amend them when necessary
- Ensure the business is adequately capitalized
- Ensure the business complies with all rules, policies, and laws
You work hard to run a successful business. Among other benefits, a corporation or LLC can protect the assets of its owners. To do this, the business requires a certain amount of upkeep. This upkeep is essential to maximizing the protection the corporation or LLC provides to its owners. If your personal assets are protected by a corporate veil, make sure that veil is Kevlar®.
How We can help.
We help your business meet all of the formal statutory requirements. We send timely reminders and checklists to keep your business on track. We coordinate efforts with your CPA and other financial professionals. You can leave the compliance headaches to us and focus on your highest payback activities—and grow your business.