You may have done your homework and weighed your options. Perhaps you've even considered the tax and non-tax implications for common business entities. We bet you're also intrigued by the protections certain business entities afford their owners. The “corporate veil” that protects personal assets of the business owners can make a corporation or limited liability company (LLC) look very attractive.
To many, the word “veil” conjures up a sheer, flimsy, ethereal piece of material—perhaps fluttering behind a beautiful bride. And yet, this same term is used by many business owners to describe the personal asset protection provided to owners of a corporation or LLC. Of course, with the right strategy you can make your veil much stronger than the one worn by a bride.
Here's what you can do to make your veil puncture proof.
Corporation and LLC Asset Protection Background
Corporations and LLCs are statute-created business entities, meaning they have been created by the legislature of your state. Courts view corporations and most LLCs as distinct entities, separate from the people—the owners—who comprise them. For this reason, the owners are not held personally liable for the business debts . . . unless a court decides to “pierce the corporate veil.” “Piercing the corporate veil” involves the court disregarding the entity's separate status and holding its owners liable for the business debts, putting the owner's personal property on the line.
Bottom line: When the veil is pierced, you can lose personal assets (your home, car, bank accounts, or more), even if you did nothing wrong.
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 are excellent business entity choices for protecting the owner's personal assets from creditors. But the protection is only as good as the commitment to operate the entity as a proper business entity. Here are some specific business practices you should consider implementing if you have not already done so.
- ●Uphold all statute-mandated formalities.
- ●Keep business funds in separate bank accounts from personal funds.
- ●For business transactions, always use the business's full legal name and sign all documents in your formal capacity.
- ●Follow the corporate bylaws or LLC operating agreement and amend