Forming an entity like a Limited Liability Corporation (LLC) or S or C corporation gives protection to those that want to open their open business, but do not want their personal assets to be at risk in case the business fails. However, if business owners are not fully informed about their obligations to the entity, they can end up piercing a corporate veil and putting themselves at financial risk.
The Concept of Piercing the Corporate Veil
The concept of piercing the corporate veil is used by courts when they can make the shareholders or members personally liable for the business’ debts and liabilities, disregarding the existence of a separate entity like a corporation or an LLC. This allows the entity’s creditors to go after the real property, bank accounts, investments, or other assets of the individuals, to pay the entity’s debts.
When Do Courts Pierce the Corporate Veil?
Piercing a corporate veil is not something that is easily and often done by the courts. However, in certain situations, courts have no choice but to hold individuals accountable for their wrongdoing and it usually occurs when fraudulent or intentional wrongdoing is proven.
Examples of Piercing the Corporate Veil
There are several circumstances in which a court would pierce the corporate veil of a business, including:
- Commingling personal and business assets;
- Failure to keep adequate corporate records;
- Failure to keep a record of decision making;
- Manipulating of business assets and liabilities;
- Not updating entity’s documents, such as bylaws, manuals;
- Failure to capitalize the entity adequately; and
- Shareholders or members treating entity assets as their own.
Avoiding Piercing the Corporate Veil
Some ways for shareholders and members to avoid the issue of piercing a corporate veil and protecting their personal assets, include, keeping good corporate records (starting with operating agreement and manuals), adequately capitalizing the entity to cover its expenses and debts, ensuring that entity has its own identity in all its financial and contractual affairs, and staying compliant with all laws and regulations.
If you need to ensure that your business is compliant, to avoid the issue of piercing the corporate veil, speak with an attorney at Sobon Law, LLC at (216) 586-4246, to help you better understand your responsibilities.