See also:
The Sacred Cow: Lack of Succession Planning
How to Keep Your Corporate Veil Closed
How to Manage your Lawyer
Corporate Veil Definition
The corporate veil definition is a legal concept that separates the actions of an organization to the actions of the shareholder. In addition, it protects them from being liable for the company’s actions. It does not necessarily mean that the protection is always in place. A court can also determine whether they hold shareholders responsible for a company’s actions or not.
Piercing the Corporate Veil
“Piercing the corporate veil” refers to a circumstance in which courts set aside limited liability and hold a company’s investors or directors personally liable for the organization’s activities or debts. Corporate veil piercing is common in closed corporations. While the laws vary from state to state, courts will generally abstain from piercing the corporate veil unless there have been signs of serious misconduct.
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Factors for Courts to Consider
Components that a court may consider when determining whether to pierce the corporate veil incorporate the following:
- Unavailability or mistakes of corporate records
- Covering or misreports of company members
- Inability to keep up associations with related entities
- Inability to observe corporate formalities relating to behavior and documentation
- Blending of assets of the company and the investors
- Manipulation of assets or liabilities
- Dysfunctional corporate officers or directors
- Notable undercapitalization of the business entity
- Draining of corporate funds by the predominant shareholder(s)
- Treatment by a person of the assets of the company as his/her own
It is critical to take note that not all of these aspects should be met all together for the court to pierce the corporate veil. In addition, a few courts may find that one factor is so convincing in a specific case that it will find the investors personally liable. For example, numerous large enterprises don’t pay dividends, with no indication of corporate indecency. But for a small or closely held company, the inability to pay dividends may indicate financial indecency.
Protecting the Corporate Veil
There are various ways to ensure you are safe from being liable for a company’s wrongful actions. Read to following ways protect yourself:
- Keep your records present and finished. In addition, your documentation should be detailed enough that you can clarify any exchange years after it occurred.
- Have a strategy for success or objective that shows how you intend to develop the organization.
- If you have stockholders or investors, then keep complete meeting minutes.
- Keep your personal finances and your business finances on separate bank accounts. Never purchase something personal with the business funds.
- Make sure you have enough money in your business bank account to cover all current exchanges and liabilities. Try not to fund your business from your personal account.
How to Keep the Corporate Veil Closed
The answer to this seems somewhat obvious: keep everything separate. Probably the most important area for separateness is in the financial arena. Document all transfers between the companies. In addition, do not be afraid to have inter-company contracts (i.e. lease agreements, notes, and contribution agreements). Then allocate expenses (including salaries) between the companies so that each pays it’s share. Have policies in place. In addition, practice keeping everything about the businesses separate. You may also consider having separate boards of directors and offices if that is practical.
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