What Does it Mean to Pierce the Corporate Veil?

Piercing the corporate veil is a serious issue since it can result in creditors being able to access the personal assets of a business owner, which could lead to bankrupt individuals and businesses alike. Businesses must take proper legal steps, like ensuring your business follows your internal governance formalities and structure, that your personal assets are kept separate from the business assets, and avoiding conflicts of interests to prevent piercing the corporate veil.

What Is the Corporate Veil?

Essentially the corporate veil is a fictional shield that protects a shareholder’s (or member’s, if you have a limited liability company) personal assets and liabilities from those of the corporation (or limited liability company). 

A corporation and its shareholders are considered separate legal entities and therefore, if a corporation and its shareholder follow specific rules of thumb, most states will recognize the shareholder and their assets as separate from the corporation and the corporation’s assets.

What Is Piercing the Corporate Veil?

Piercing the corporate veil happens when the shareholder fails to separate their personal assets and liabilities from those of the corporation. When this occurs, a court may disregard an entity’s corporate form, which would cause the individual to lose their limited liability protection. That individual would be held personally liable for the obligations of the corporation.

How Do I Avoid Piercing the Corporate Veil?

Many clients ask me how to avoid piercing the corporate veil and protect their personal assets from being subject to their business liabilities. First and foremost, is to form a separate entity for your business, such as a limited liability company or corporation. The type of entity one chooses will depend on a number of different important factors, which a business lawyer can explain. 

However, forming an entity alone does not guarantee protection of one’s personal assets. Shareholders should always observe their corporate formalities and structures. Additionally, one must be sure to separate their business activities and finances from their personal activities and finances. In legal terms, one wants to avoid piercing the corporate veil. 

Below is a checklist that shareholders may use to help avoid the potential piercing of the corporate veil. While the list below is specific to a corporation, members of a limited liability company would want to follow many of the same guidelines, where applicable. 

Seek legal expertise to ensure you are in compliance and correctly following these general guidelines:

Company Formation Requirements:

• Conduct a pre-organizational meeting and record the minutes;

• File the Articles of Incorporation (or Articles of Organization for an LLC) with the appropriate jurisdiction;

• Draft and adopt corporate bylaws and a shareholder agreement (or operating agreement for an LLC);

• Conduct an initial Board of Director meeting and record the minutes;

• Conduct an initial shareholder meeting and record the minutes; and

• Issue stock certificates (although this is not required), maintain a stock transfer ledger, and apply for appropriate securities exemptions (if applicable).

Company Internal Governance Requirements:

• Conduct annual shareholder meetings and record the minutes;

• Conduct annual Board of Director meetings and record the minutes;

• Send meeting notices prior to each meeting and keep records of it;

• File a separate tax return for the business by using the company’s EIN;

• File and pay employment taxes and unemployment insurance;

• Keep all agreements updated and in a place where they can be easily accessed; 

• Document and file all shareholder and Board of Director resolutions;

• File annual reports timely and retain records of filing;

• Keep registered agent information updated;

• Avoid under-capitalization; and

• Cautiously distribute dividends by seeking professional advice from a CPA.

Avoid Conflicts of Interest or Commingling Funds:

• NEVER treat the corporation’s property as personal property;

• Ensure the corporation is not used to lend money to its shareholders, Directors, or Officers;

• Always maintain separate business bank accounts, assets, and liabilities and NEVER commingle transactions with personal bank accounts, assets, and liabilities; 

• Use the company’s logo, name, and address at all times to clearly display that the corporation is conducting business and not you as an individual;

• Have authorized Director and Officers sign contracts and correspondences in reference to their corporate designation (President, Treasurer, Secretary); and

• Ensure that compensation for Directors and Officers are reasonable and not overly excessive. 

Never Commingle Finances and Avoid Self-Dealing 

The most important take-away is do not commingle personal and business financials. Keep a separate business bank account and avoid self-dealing and conflicts of interest between the individual and the corporation.

Have questions about how to form an entity, whether you formed your entity correctly, how to make sure you avoid piercing the corporate veil, or questions regarding the statutory requirements of particular entities?

We are here to help with any business questions and concerns.