What does it mean to pierce the corporate veil?

Understanding Corporate Structures

Corporations and limited liability companies (LLCs) operate independently from their owners, which means that business assets are distinct from personal assets. One of the primary motivations for incorporating your business or forming an LLC is to gain personal asset protection. However, this protection is not foolproof; there are responsibilities associated with it.

Five Steps to Maintain Personal Asset Protection and Avoid Piercing the Corporate Veil

To ensure that your corporation or LLC is recognized as a separate entity from its owners, certain measures must be taken. Here are key steps to follow:

1. Follow Necessary Formalities

   • Corporations:

     • Draft and regularly update bylaws.

     • Issue shares of stock to shareholders and maintain a stock transfer ledger.

     • Conduct both initial and annual meetings for directors and shareholders.

     • Complete any required annual filings on time and pay the necessary fees.

     • Pay corporate taxes.

   • LLCs:

     • Complete any necessary annual filings and pay associated fees.

     • Recommended practices include creating and updating an operating agreement, issuing membership certificates to owners, maintaining a membership transfer ledger, and holding both initial and annual meetings for members (and managers if applicable).

2. Document Your Business Activities

   • Keep records of significant business decisions and meetings.

   • Retain signed contracts and minutes from your initial and annual meetings.

   • Maintain all formal business documents for a minimum of seven years.

3. Avoid Commingling Assets

   • Keep business and personal assets separate.

   • Utilize a business checking account and credit card exclusively for business-related expenses.

   • Ensure that assets like equipment and property are distinctly categorized.

4. Ensure Sufficient Business Capitalization

   • Your business will need adequate funding and resources to commence and sustain operations.

   • This can be achieved through personal investment, accepting funding from others who become owners, or securing a business loan.

   • Remember, this capital should be allocated to the business itself, not to personal use.

5. Promote Your Corporate or LLC Status

   • Design business cards that clearly display the name of your corporation or LLC.

   • Conduct purchases and pay invoices using your business checking account or credit card.

   • Issue invoices in the company's name and ensure that all contracts, leases, and other documents are signed under the company's name.