A key reason that business owners and managers choose to form a corporation or a limited liability company (LLC) is so that they won’t be held personally liable for debts should the business be unable to pay its creditors. But sometimes courts will hold an LLC or corporation’s owners, members, and shareholders personally liable for business debts. When this happens it’s called “piercing the corporate veil.”
When my clients meet with me the first order of business is to explain the importance of keeping your personal and business transactions separate. As a corporation, you hold yourself separate from your business. In a corporation you are an employee, in an LLC you are a member. I also recommend that you consult with a business lawyer to set up your corporation and discuss your legal responsibilities.
Circumstances that can pierce the corporate veil:
- No financial separation between the company and its owners.
- The company’s actions were wrongful or fraudulent.
- Failure to follow corporate formalities such as holding annual meetings, keeping accurate and detailed records, adopting company bylaws and making sure that officers and agents abide by these bylaws.
- Commingling Assets – meaning not keeping separate bank accounts for business and personal, not keeping personal assets separate from business assets.
- Under-capitalizing the corporation or LLC.
- Not identifying your company on stationery, contracts, etc. as INC or LLC.
If you are sued personally for the debts of your business (a lawsuit names you and your business as defendants, or a creditor threatens to name you personally in a lawsuit), you may need the help of a business attorney to defend yourself.