31 Mar Piercing The Corporate Veil-Important Information
One of the primary advantages of incorporating a business is that the business owners are not held personally liable for the debts or liabilities of the entity (as used herein, entities include corporations, limited liability companies, and limited partnerships.
In other words, creditors can only pursue the entity’s assets and cannot reach the assets of the business owner. That layer of protection which separates the entities liabilities from the business pwner’s persoanl assets is commonly known as the “corporate veil”.
Under some circumstances, a creditor can pierce the “corporate veil” and reach the assets of the business owner. While the law may differ slightly from state to state, here are the most common ways in which a business owner can lose the protection the corporate veil offers are as follows:
1. Alter Ego- This occurs when the entity ignores the corporate formalities such that it may be considered the “alter ego” of the business owner. Corporate formalities include corporate annual meetings and preparation of minutes documenting what was discussed and agreed upon at the meeting.
2. Inadequate Capitalization at the Time of Formation- this occurs when the business entity is inadequately capitalized at the time of formation to reasonably cover current liabilities and debt obligations. Also, when a business owner incurs debts without enough current working capital to pay for this liability. In this circumstance, the business owner cannot rely upon the corporate veil to avoid payment for the liability.
3. Confusing Your Customer or Vendor- This occurs when not using the company name on all contracts and marketing material. The public as well as vendors need to know who they are doing business with. If you confuse the matter, you expose yourself personally.
4. Commingling Funds- This occurs when you use the company bank account for personal items. Remember the corporation is not your private bank account. There needs to be separation between the company’s financial operations and your personal financial affairs. If you need to take out money from the entity, take a draw from the business account first and then pay for your personal expenses from the draw.
For additional assistance in this sensitive area, please feel free to contact me.