If you’re starting a business, you may have started to do your homework to weigh your options for what kind of business entity you want to create.
You’ve likely considered the tax and non-tax implications for the different types of entities. If so, then you’ve probably also run across information on 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.
The term “veil” is used by many business owners to describe the personal asset protection that “veils” or covers the owners of a corporation or LLC. 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. For this reason, the owners are not held personally liable for the business debts. There are cases, however, where a court can decide to “pierce the corporate veil” and disregard the entity’s separate status, thereby holding the owners liable for the business debts. This puts the owner’s personal property on the line including their home, bank accounts, car, and more. This can happen even if the owners have done nothing personally 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 operate the entity as a proper business entity. Here are some specific business practices you should consider implementing 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 applicable rules, policies, and laws.
- Vet the companies that you may be partnering with or on which you rely for business referrals. If they don’t appear to be complying with all the corporate state laws, you may want to consider doing business with a company that does, or else risk getting tangled up in their mistakes and poor choices.
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
Well-written Contracts, Operating Agreements, Bylaws and other corporate documents are the key to protecting yourself and your assets. We can help ensure that your business meets all of the formal statutory requirements to protect your corporate veil and offer additional guidance. The experienced corporate and business attorneys here at Davis Law Group are ready to take the headache of compliance off of you so that you can focus on what matters most to you – growing your business!