Will A Corporation or LLC Really Protect Your Personal Assets?
You own a business or are about to start one. It seems that everyone is telling you that you need a corporation or a limited liability company (LLC). They tell you that these will protect you against lawsuits and your business debts. You want your family’s assets to remain safe. So, you did your homework and are weighing your options. Now the protections certain business entities afford their owners intrigue you.
The “corporate veil” that protects personal assets of business owners can make a corporation or LLC look very attractive; however, the protections of a corporation or LLC are not necessarily guaranteed. Determined plaintiff lawyers may ask a court to “pierce the corporate veil” to collect a judgment. Sometimes they succeed in doing just that and reach the business owner’s personal assets. Whether the veil will be pierced depends a lot on how you set up and manage your business structure.
Here is what you can do to make your veil puncture proof.
Corporation and LLC Asset Protection Background
Corporations and LLCs are statute-created business entities. They are created under laws passed by the legislature of your state. Courts view corporations and most LLCs as distinct entities, separate from the people that own them. The owners are not held personally liable for the business debts because courts view these business entities as distinct; however, the protection is lost when a court decides to “pierce the corporate veil.”
“Piercing the corporate veil” involves a court deciding to disregard the entity’s separate status. Once this happens, the disregarded entity’s owners are liable for the business debts. The owner’s personal property is now on the line. You can lose personal assets like your home, car, bank accounts, and more when the corporate veil is pierced.
WARNING: The smaller and more closely held the business, the more intensely the court will scrutinize it. Small business owners must pay particular attention to this issue.
How to Make Your Corporate Veil Strong
Corporations and LLCs can be excellent business entity choices for protecting the owner’s personal assets from creditors of the business. But the protection is only as good as the commitment to operate the entity properly. If you do not treat your business as a separate and distinct entity, it is more likely that a court will do likewise. If you have not done so, consider implementing these specific business practices:
- Uphold all statute-mandated formalities;
- Keep business funds in separate bank accounts from personal funds;
- For business transactions, always use the business entity’s full legal name and sign all documents in your formal capacity;
- Follow the corporate bylaws or LLC operating agreement and amend them when necessary;
- Adequately capitalize the business; and
- Ensure the business and all related parties comply with all applicable rules, policies, and laws.
Establishing the corporate entity with the Secretary of State is a starting point, not the finish line. Legal entities like corporations and LLC’s require upkeep that is essential to maintaining and maximizing the protection the corporation or LLC provides to its owners. If you are relying on a corporate veil to protect your personal assets, invest the necessary resources to ensure that it is strong.
How We Can Help
You did not start your business to render legal services to yourself any more than you started a business to handle your own bookkeeping or answer your own phones. We are here to help you stop “working in” your business and focus your time and efforts “working on” your business. Our business is taking on that legal work, assisting our clients in meeting all of the formal statutory requirements, protecting the corporate veil, and offering valued legal counsel and advice. With our expertise and experience, you can leave the compliance headaches to us and focus on what matters most to you; growing your business.
