Piercing Corporate Veil
You have taken heed to the rise and threat of frivolous lawsuits, and you know you must protect yourself and your business. You do not want to lose the years of hard work you put into your business due to an unexpected accident. You want personal protection from mistakes and debts, and you have obtained such protection by converting your business into a corporation. Now all you have to do is continue your daily business as usual all while reaping the benefits of your newly deployed veil of protection, right? This may be the common thought but it is unfortunately not correct.
There are a whole new set of rules that you must abide by after turning your business into a corporation. Most business owners know of these rules but they just do not know how to follow them. If these rules are found to be ignored, the courts will decide if they should hold the business owners personally responsible by “piercing the corporate veil”. The lawyers at Albut Law are to determined to make sure this does not happen to you.
The most common mistakes made by business owners happen when they fail to keep a disconnection between them self and the business. For example, how many times have you gone to buy new supplies for your business, reluctantly realizing you do not have your company credit card with you. A long line of impatient customers are relieved when you decide to pay with your own personal card. This is completely okay to do only if the company pays you back, and you keep detailed records about how and why it happened, also provided that it does not happen very often.
Co-mingling of funds between your personal and business accounts can quickly become a situation you find yourself in. This looks very bad to the courts and should be avoided at all times. Keeping detailed records about every transaction is highly advised for those times when it cannot be avoided. Do not keep mental notes of these transactions. Get in the habit of writing these detailed notes down on paper as they happen. If your company has an accounting department, or a board of directors, make sure you get them involved. Accountants are with the company for a reason, utilize them and make them aware of any transactions that could possibly look suspicious to a court of law.
While there are many factors that are involved in piercing the corporate veil, one of the worst and most obvious to the courts is the intent to avoid performance. In this example a client hires you to perform a service for them. They happily pay you after hearing you will complete the service. Meanwhile you have no intentions of completing this service and you keep their money after filing for bankruptcy. This act will most likely give reason to ignore your corporate protection and hold you personally responsible.
Maybe your company is on the brink of disaster and you do not want to take on the debt yourself, so you create a corporation and use it to absorb your debts, freeing your personal life from responsibility. This is called transfer of liabilities and will no doubt raise a red flag on the judicial flagpole. Make sure your company is not under-capitalized by keeping your profits larger than your debts. Do not purposely avoid paying company debts.
The best thing you can do to show you understand and follow the necessary corporate formalities is keep a blatant division between your personal life and your corporation. The last thing you want is for your company to appear as an “alter ego” of your personal life. Keep detailed records of absolutely everything. Make strong attempts to pay off company debts, if any. Do not complete your work day without thinking of corporate compliance. Please contact the lawyers at Albut Law for any of your corporate compliance concerns, we are always here to help.