Suppose you’re starting a business, whether a partnership or personal, you should consider making it a limited liability company.
Nearly 34% of small businesses in the US are LLCs, while 19% are corporations. What’s more, 69% of businesses begin at home due to limited capital.
So, why go for an LLC? Typically, LLCs offer their owners liability protection against creditors known as the corporate veil. This shield is legal, and creditors cannot touch your personal assets such as property or retirement savings.
However, registering your business as an LLC is not a guarantee that you’ll have full liability protection. Creditors may still sue the owners and seize their assets to recover the business’ debts. This process is known as piercing the corporate veil.
Here is a quick guide on everything you need to know about piercing the corporate veil.
- Piercing the Corporate Veil Examples
These are activities that jeopardize the corporate veil of incorporation. Piercing the corporate veil examples include engaging in activities that sacrifice the public good for corporate gain.
Using the business credit card to foot personal bills can also make a shareholder lose liability protection. Other examples include failure to meet compliance obligations and missing LLC or corporate records.
- Business Registration Compliance to Keep the Corporate Veil Intact
The first step to avoiding piercing the corporate veil is complying with all entity formation requirements when starting a business. Some requirements include obtaining the Federal Tax ID, securing business licenses & permits, and adopting an LLC Operating Agreement.
Moreover, there are also other ongoing compliance requirements so long as the business is operational. They include submitting annual reports, remitting taxes, and renewing licenses and permits.
- Setting Up a Company Bank Account
Now that you know what is a corporate veil, you ought to keep personal funds separately from the business. This can start by opening savings and checking bank accounts solely for the company funds.
It’s also imperative to use company checks on business transactions only. This way, you won’t have any shades of grey when auditors reconcile end-year statements.
- Don’t Be a Guarantor for Business Loans
Shareholders and business owners may put their personal assets at risk if they step in as guarantors for business loans. If the business fails to service the loan, you’ll be on the hook to ensure creditors recover their money.
For the creditors to recover this money, it might mean losing all the assets that took you years of commitment to buy or build.
- Avoid Legal Troubles
Business owners have no liability protection against fraudulent actions perpetrated by their companies. Thus, it will help if you avoid any reckless, illegal activities that would give creditors the upper edge to pierce the corporate veil.
For instance, you can’t enter into a business contract knowing that the company cannot fund it. If the business fails to pay the contractor in this case, the owners may end up owning the responsibility. Creditors may seize their assets to pay the contract dues.
Safeguarding the Corporate Veil of Incorporation
The list of practices that may pierce the corporate veil is certainly longer than this one. However, fulfilling these guidelines will strengthen your shield against business liabilities. If you’re not sure about what to pay attention to, you can always seek expert advice.
Access more resources on corporate veil definition from other articles on this site.
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