One of the perks of going through the trouble of incorporating your business is the protection it provides against attempts to hold you personally liable for your business debts. However, many solo entrepreneurs and small businesses often lose this protection because they inadvertently violate one or more of the conditions required to maintain your incorporated status.
Here are a couple of ways creditors can pierce the corporate veil to pin your business debts on you and what you can to avoid this:
What is the Corporate Veil?
The corporate veil is a set of laws that shield business owners and shareholders from personal liability for the debts incurred by the company. In the event the company goes bankrupt or is subjected to a lawsuit, it prevents creditors from seizing homes, cars, investments and other personal assets belonging to those involved in the company.
However, creditors can "pierce the corporate veil" if they can successfully convince a court that the veil didn't actually exist in the first place, that you used the business to perpetuate fraud or perform wrongful actions, or that maintaining the corporate veil would unjustly hurt the creditor.
For example, the court may rule in favor of a bank suing you personally for a business loan if it can prove you obtained the loan using fraudulent means. Not only is fraud illegal, but allowing the bank to suffer the loss could be seen as being unfair or unjust.
Protecting the Veil
There are two main areas where creditors can poke holes in your corporate veil: Failure to maintain corporate formalities and the co-mingling business and personal assets.
When you incorporate your business, there are certain formalities you must take to maintain that status such as:
Solo entrepreneurs and small family-owned businesses are at a greater risk of losing their corporate status because they are more likely to run their businesses in an informal manner. After all, it may seem silly to meet with yourself once a year to make important decisions about your business if you're the only owner or shareholder. Regardless of how absurd it may seem, though, it's important to uphold these formalities to ensure there is adequate distance between you and your company.
The Dangers of Co-mingling Personal and Business Assets
Another area that gets a lot of business owners into trouble is the co-mingling of personal and business assets. Examples of this includes using money from the business' checking account to pay for personal expenses (e.g. mortgage note) or diverting company assets for personal use (e.g. using the company car for non-business tasks).
Again, micro and small business owners are more likely to commit these errors. Therefore, it's important that you put strict policies in place regarding the use of company property by family members or co-owners and that you only use the business accounts for business expenses.
If a creditor is trying to break through the corporate veil to get at your personal assets, it's essential that you contact an attorney as soon as possible. A lawyer can help you gather the necessary documents and put together a viable strategy to successfully defend against the business law attack.Share
3 December 2014
Like many people, I once found learning about law very intimidating. My brother went to law school and I remember glancing through a few of his books and wondering if I was actually reading English due to all of the legal jargon in them! However, when I ended up in a sticky legal situation due to accidentally breaking a small law I didn't know existed, I realized that I needed to learn more about the law, so I could make sure to follow it precisely in the future. My brother helped to break down some complicated legal concepts to me, and I have since been studying up online. I want to post what I have learned and continue to learn about law in the future on my new blog, so my knowledge cannot only help myself, but also help others!