What is the Corporate Veil and How to Avoid Piercing it

When starting a business, one of the most important decisions you will make is choosing the right business structure. Whether it’s a sole proprietorship, partnership, limited liability company (LLC), or corporation, each has its unique set of benefits and drawbacks. One of the most significant advantages of forming a corporation or LLC is the limited liability protection they offer. Limited liability means that the business owner’s personal assets are protected from any liabilities or debts incurred by the business.

However, this protection is not absolute, and it can be lost if the business owner fails to maintain the separation between their personal and business affairs. This is known as piercing the corporate veil, and it can have devastating consequences for the business owner if found to be in error if such claim is brought against them. Here are five (5) operational tips on how to avoid piercing the corporate veil.

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1. Maintain Separate Finances

One of the most crucial steps to maintaining the corporate veil is to keep your personal and business finances separate. This means having a separate bank account and credit card for your business, paying business expenses with business funds, and avoiding using personal funds for business expenses. Mixing personal and business finances can be seen as commingling of funds, which can lead to piercing the corporate veil.

2. Proper Record-Keeping

Another essential step in maintaining the corporate veil is keeping proper records of all business transactions. This includes keeping receipts, invoices, and bank statements. Proper record-keeping shows that you are treating your business as a separate entity, which can help protect your personal assets.

3. Follow Corporate Formalities

Forming a corporation or LLC requires following certain corporate formalities, such as holding annual meetings, maintaining corporate bylaws, and keeping accurate corporate records. Failure to follow these formalities can be seen as evidence that you are not treating your business as a separate entity, which can lead to piercing the corporate veil.

4. Avoid Fraudulent or Illegal Activity

Engaging in fraudulent or illegal activity can be grounds for piercing the corporate veil. This includes things like underreporting income, falsifying records, or intentionally misleading creditors. If you are caught engaging in fraudulent or illegal activity, you can be held personally liable for any damages or debts incurred by the business.

5. Obtain Sufficient Insurance Coverage

No matter how well you maintain the corporate veil, there is always a risk of being sued. Obtaining sufficient insurance coverage, such as liability insurance or errors and omissions insurance, can help protect your personal assets if a lawsuit arises.

In closing, maintaining the corporate veil is essential for protecting your personal assets from the liabilities and debts of your business. To avoid piercing the corporate veil, you should maintain separate finances, keep proper records, follow corporate formalities, avoid fraudulent or illegal activity, and obtain sufficient insurance coverage. By following these steps, you can help ensure that your business remains successful, and your personal assets are protected overtime. 

About the Author

Theresa J. Thomas is the owner of The Prosperity Experts, a Professional Corporate Service Company, that provides business support services to entrepreneurs and small to medium size businesses. Theresa has a combined thirteen years of working in the financial sector and has developed a skill for identifying financial solutions for the clients she serves. To schedule a consultation, visit www.theprosperityexperts.com or call (888) 686-3323.

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There are parking meters, two paid lots, and a paid parking garage on 8th street. Monthly Passes are optional. 

These are the designated parking options when visiting The Presley Post. 

Do not park in the lot behind our building. This is a violation and your car WILL BE TOWED at your expense. NO EXCEPTIONS.

This lot is reserved for the law office upstairs and it is being watched.

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