You may have done your homework and weighed your options. Perhaps you’ve even considered the tax and non-tax implications for common business entities. We bet you’re also intrigued by the protections certain business entities afford their owners. The “corporate veil” that protects personal assets of the business owners can make a corporation or limited liability company (LLC) look very attractive.
To many, the word “veil” conjures up a sheer, flimsy, ethereal piece of material—perhaps fluttering behind a beautiful bride. And yet, this same term is used by many business owners to describe the personal asset protection provided to owners of a corporation or LLC. Of course, with the right strategy you can make your veil stronger than the one worn by a bride.
Here’s what you can do to make your veil puncture proof.
Corporation and LLC Asset Protection Background
Corporations and LLCs are statute-created business entities, meaning they have been created by the legislature of your state. Courts view corporations and most LLCs as distinct entities, separate from the people—the owners—who comprise them. The owners are not held personally liable for the business debts . . . unless a court decides to “pierce the corporate veil.” “Piercing the corporate veil” involves the court disregarding the entity’s separate status and holding its owners liable for the business debts, putting the owner’s personal property on the line.
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.
WARNING:The smaller and more closely held the business, the more intensely the court will scrutinize it. Small business owners must pay particular attention to this issue.
How to Make Your Corporate Veil Strong
Corporations and LLCs are excellent business entity choices for protecting the owner’s personal assets from creditors. But the protection is only as good as the commitment to run the entity as a proper business entity. Here are some specific business practices you should implement if you have not already done so.
- Uphold all statute-mandated formalities.
- Keep business funds in separate bank accounts from personal funds.
- For business transactions, always use the business’s full legal name and sign all documents in your formal capacity.
- Follow the corporate bylaws or LLC operating agreement and amend them when necessary.
- Make sure the business is adequately capitalized.
- Ensure the business and all related parties comply with all rules, policies, and laws.
This upkeep is essential to maximizing the protection the corporation or LLC provides to its owners. If you are relying on a corporate veil to protect your personal assets, make sure that veil is made of Kevlar®.
How We Can Help
We are here to help your business meet the formal statutory requirements to protect your corporate veil and offer additional guidance. With our expertise and experience, you can leave the compliance headaches to us and focus on what matters most to you, growing your business.
NOTICE: The information on this website does not constitute legal advice and you should not rely on any information without seeking the advice of a competent attorney licensed to practice in your jurisdiction. This web site is both a communication and/or solicitation as defined by California Rules of Professional Conduct, rule 1-400. For further information, please click here.