Pierce the Corporate Veil
by: Tyler Weaver
The corporate structure of your business will provide shelter
for your personal assets. There are several events that will cause
a judge to disregard the corporate entity or "pierce the corporate
veil." There are several reasons why the corporate veil may
be pierced. There are also several easy steps you can do to avoid
the corporate veil from being pierced.
The corporate veil can be pierced if a party is tricked or misled
into dealing with the corporation rather than an individual. Whenever
the corporation does correspondence with a third party, the officers
and directors of that company need to make it clear that they are
acting on behalf of the corporation and not themselves individually.
All the documents need to clearly be entered into on behalf of
the corporation otherwise there may be a conflict that could arise
that would pierce the corporate veil.
If the corporation is set up to never make a profit or always
be insolvent it is considered too "thinly" capitalized.
This could be when the corporation is formed without sufficient
capital to meet potential liabilities and debts. This often occurs
when an individual or group of people uses a corporation as a form
of shield from liabilities instead of a legitimate business.
When the corporation fails to follow corporate formalities where
the corporation is located, it can be pierced. A few of the corporate
formalities are meetings, minutes, stock ledger. If the corporate
entity fails to do some of these duties the judge can rule that
it is not a proper corporation.
The biggest mistake small corporations usually make is not keeping
separate accounts for the corporation. If an individual moves funds
from their bank account into the corporate bank account, and vise
versa then the court will disregard the corporate entity.
If the corporation is engaged in illegal enterprise where it is
ruled that the corporation was setup as a sole means for those
involved to partake in an illegal activity, the corporate veil
can be pierced. For instance, a corporation will not be tried for
murder. The individuals responsible will be tried for it. The same
thing can be applied for all kinds of cases such as drug trafficking,
etc.
While it is possible for the corporate veil to be pierced, if
you take the proper precautions when setting up your corporation
you will help to protect your own personal assets. A few of the
steps to protecting your personal assets are quite simple and some
are even common sense. The important thing is that you take care
when operating a business, and you get sound legal advice before
doing anything questionable. |
