Why 'Piercing the Corporate Veil' Could Leave You on the Hook
Keeping your corporate and personal assets separate isn't just a good idea -- it's a survival skill. That's why you need to avoid doing these 10 things.
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PrintDid you know trying to pierce the veil of a privately held corporation or LLC, is the most litigated issue in corporate law today?
Once the corporate veil is pierced the liabilities of the business become the liabilities of its owners.
The legal theory used to accomplish this is known as the “alter ego” theory. This is the principle that decides whether a business owner is truly operating his or her corporation as a separate entity.
Commingling business and personal funds is one of the biggest mistakes that causes this piercing of the corporate veil. But there are others.
To protect yourself and maintain the integrity of the corporate veil you should know what types of practices can put you at risk. Otherwise, your corporation is more likely to put your assets at risk than to protect them.
Review the following list of 10 commingling activities to avoid so you can prevent "alter ego" now and in the future:
- Depositing company funds into a personal account rather than the business account.
- Paying personal bills with corporate funds.
- Using personal bank accounts for business.
- Paying business expenses with personal funds.
- Depositing corporate funds to and from another company’s bank account.
- Withdrawing corporate funds to and from another company’s bank account.
- Moving assets between businesses in order to generate or access funds.
- Moving assets between the business and its owner(s) in order to generate or access funds.
- Mixing bank accounts between businesses.
- Issuing company loans to shareholders, directors or officers without proper documentation.
As long as you respect this separateness, your business entity will have no issues being recognized as a separate legal entity and will be ultimately responsible for its own debts.
However, there are many other commingling activities related to loans that can also put you at risk. The bottom line is if your business loans money to another company or to a director, officer, or shareholder of the corporation make sure it’s done properly.
Complete the required loan documents and ensure that the borrower complies with the terms of the loan. Your company is also responsible to comply because failure to do so can open your company up to commingling of funds. Don’t commingle business assets with personal assets. And don’t commingle your company’s assets with another company that you own.
On a final note, proper recordkeeping is also critical to protecting your limited liability, even when you establish business credit in the name of your business.
Don’t leave yourself open to piercing the corporate veil. Because you don’t want to get stuck with unlimited personal liability for all the debts of your business.
Marco is founder of the Business Credit Insiders Circle, a step-by-step business credit building system providing fleet credit cards, vendor lines of credit, business credit cards, merchant lines of credit, and funding sources. You may contact Marco directly at: marco@businesscreditblogger.com. Follow Marco on Twitter @MarcoCarbajo and read more of his insights on building business credit.
