Many business owners incorrectly believe that forming and operating their businesses in a corporation, limited liability company, or other form of business entity indefinitely and unassailably protects their personal assets from company lawsuits, creditors, and other liabilities.
In reality, maintaining protection of personal assets from company liabilities is an ongoing obligation to prevent a creditor or other claimant asserting that the company is not in reality separate from its owners.
In legal jargon, asserting that a business entity should not be treated as a separate entity from its owners is often referred to as “piercing (or lifting) the corporate veil.” Piercing the corporate veil is an extraordinary (and sometimes hard to establish) remedy for plaintiffs seeking to impose liability directly on an entity’s owners. Successful veil piercing claims involve proving one or more factors, such as not maintaining company assets separate from personal assets, being inadequately capitalized, or using the company form to engage in fraud. Among the easiest things business owners can do to preserve the protections of the company form is maintaining compliance with corporate formalities, such as having directors and officers that actually perform the normal duties of such positions, maintaining minutes of meetings or executing annual written consents, having up-to-date and accurate equity records, and keeping company assets separate from personal assets.
Veil piercing risk should be a particular focus for multi-entity organizations where parent or other affiliated entities can be exposed to the liabilities of a subsidiary. Multi-entity organizations need to be sure that the various entities within the organization are maintaining corporate separateness by not allowing the parent organization to operate the day-to-day activities of the subsidiary, assuring inter-company contracts are approved by each entity on arms-length terms, and having the entities segregate funds, maintain separate financial records, and utilize different bank accounts. With proper attention and planning business owners can greatly minimize any actual or perceived risk of being held personally responsible for company liabilities.
This post was written by Timothy Kravetz