One of the reasons for incorporating or forming a limited liability company for your small business is to protect yourself and affiliated entities from personal liability. However, the shield of limited liability company (LLC) might not be enough to protect you from personal assets and investments being used to cover the liabilities and debts of the business.
‘Piercing the corporate veil’ refers to a court decision to disregard the limited liability of your company and hold corporate shareholders or directors accountable for the company’s actions or debt.
This puts your assets and investments at risk. A court may decide to pierce the corporate veil for the following reasons:
• The corporation was used to commit fraud
• A corporation is the alter-ego of the parent corporation or the shareholders/directors
• The integrity of the LLC is jeopardized by the owner’s inability to maintain the LLC
Maintaining the corporate veil is not difficult. As a business owner, there are a few things you should do to prevent losing your company’s limited liability status.
Here are tips that should help you maintain the integrity of your corporate veil;
Keeping personal assets and business assets separate is vital. This starts by having different bank accounts for personal finances and those of the company. Don’t spend corporate funds on personal needs. Rather, transfer money as needed for distributions to a personal account prior to purchasing personal items or services.
Maintaining a distinct legal separation between you and the company will go a long way to protect you and your shareholders of any liability associated with the company.
You require sufficient capital for incorporation and to operate the business while maintaining the integrity of the corporate veil.
Deliberate undercapitalization may be used as grounds for piercing the corporate veil, which can lead to you becoming financially responsible for any legitimate claims against your company.
You can finance your business through loans or investors. You can also obtain ‘Error and Omission’ Insurance to cover you for legal action caused by your conduct while representing the company.
Every corporation and LLC is expected to follow some requirements and safety measures depending on the state. They may include:
• Perform all annual fillings
• Issue membership certificates to owners
• Develop and often update the operational agreement
• Develop bylaws and update them regularly
• Pay taxes and all necessary filings
• Schedule annual meetings of shareholders and keep the minutes of the meetings with company records
All critical business decisions and meetings should be well documented.
• Minutes of initial shareholders meetings
• The ledger of all shares issued to shareholders, and their value
• Records of all payments made and received, invoices, and statements
• Profits and losses balance sheets from each year should also be kept as well as business loans and their repayment terms
The consequences of neglecting corporate formalities are tremendous and come at a cost. If you’re unsure of whether you comply with the requirements and guidelines, contact us today, we will help you navigate through and protect you from having your corporate veil pierced.
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How the SECURE Act Impacts Small Business Owners
What You Need to Know About the QBI Deduction
Do You Need to Send Out 1099s?
Checklist for Maintaining Your Limited Liability: Avoiding Piercing the Corporate Veil
Why Small Businesses Need a CPA