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August 22, 2017
When you initially sat down and thought about starting your business, you likely took a second to think about your personal liability, and how best to protect your assets. You probably did a bunch of research, and maybe even spoke with an attorney. In the end, you no doubt debated the merits between forming an LLC or a corporation to run your business. (If you didn’t, stop reading and call us now!)
The main driving force behind your decision to incorporate was likely the limitations on your personal liability for the debts of the business. By forming an LLC or C-Corp, you knew that, should your company fall on hard times, or be subject to a lawsuit, your personal assets wouldn’t be at arm’s reach of any creditors or judgments. Well, I have some bad news… that’s not entirely accurate.
Keep something very important in mind: just being incorporated doesn’t necessarily protect you from personal liability. Incorporating is only the first step – albeit, an important one. Now, you have to make sure you continue treating your business as an entity separate from yourself.
As attorneys, when we want to sue an incorporated entity, we look for ways to get around the liability protections afforded by the organization, and get to the personal assets of the individual. Fortunately, most incorporated businesses make this task all too easy. Why? Because most business owners don’t know the rules associated with incorporation.
In short, if a creditor can show that the business owners, members, or shareholders’ actions were outside of normal business practices, a court may be willing to Pierce the Corporate Veil, and thereby expose the individual to the liabilities of the company.
The Doctrine of Piercing the Corporate Veil is fairly straightforward. Basically, if you don’t treat your company completely independently from your personal life, then liability protection goes away. Here are some examples:
1. Don’t ever – EVER – comingle funds. Keep your business accounts separate from your personal ones. Comingling business and personal funds is just begging to have your liability protections stripped.
2. Make sure your business is properly funded. Don’t purchase $200,000 worth of goods on credit, when the company only has $10,000 in assets and $5,000 in receivable. Not being adequately funded is an easy way to have a court pierce the veil.
3. This shouldn’t need to be said, but don’t commit fraudulent or deceitful acts. A court will have no patience for a business owner who, through their corporation, commits acts of fraud. They’ll strip your liability protection without thinking twice.
4. Treat your business like a business; not an extension of yourself. The idea behind incorporating is that the business is a separate entity from those who run it. As an example, don’t pay your home utilities bills using the company credit card; even if your intent is to pay the money back. Any transactions that could show personal and corporate overlap may be enough to pierce the veil.
Although this isn’t an exhaustive list, it’s a good start. Piercing the veil isn’t something most business owners are concerned about; primarily because they don’t know what it is. Unfortunately, when they get to court and the judge decides that the liability protections don’t apply, it’s too late to do anything about it.
Be smart. Know the rules for keeping your liability protections. Give us a call today and let us review your business practices for any weaknesses.