Piercing the Corporate Veil: The Legal Separation Between You and Your Business

What does it mean to pierce the corporate veil?

Many people starting a new business decide to form a corporation or LLC because of the personal liability protection these types of businesses offer; if the business defaults on a loan, creditors cannot go after the assets of the individual owners to recover that debt.

However, this protection has stipulations. The business must follow all corporate formalities—if a business is shown to have acted improperly, the courts can “pierce the corporate veil” and hold individual owners responsible for debts and obligations of the business.

How can I keep the courts from piercing the corporate veil?

There are many rules and regulations that you should familiarize yourself with, but there are a few basic things you should do to avoid the corporate veil being pierced.

  1. Follow all corporate formalities. This, broadly, means that you should run your business properly. File all required paperwork with the state, follow all procedures, and don’t mingle your personal and corporate assets.
  2. Don’t influence the dealings of your business because of your own personal purposes.
  3. Make sure your officers all have their duties to perform—no Bluth Company–style officers that collect paychecks and do nothing—and make sure no one officer has a disproportionate amount of control.
  4. Don’t engage in fraud by using your company to protect you from your own shady dealings.

Of course, it is up to you to determine the rules and regulations you must abide by; for comprehensive legal advice specific to your situation, contact a lawyer.


Corporate Veil
Image courtesy of Timo Elliott. Some rights reserved.

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