Piercing the corporate veil is a legal jargon that relates to the loss of personal asset protection of owners and shareholders of either a partnership or an LLC (limited liability company). It usually occurs when a creditor has filed a suit against a company for fraudulent or negligent business practices that finally resulted in financial damages or unpaid debts to a creditor. If the creditor wins its cause, a court judgment is ruled against the company allowing the creditor to take advantage of the assets owned by the company. However, if the company doesn’t have adequate assets to meet the judgment, the creditor can then proceed to go after the company owner’s personal assets by using a legal process called piercing the corporate veil. Once this occurs, the owner is in danger of losing personal items that dictates his particular daily lifestyle. These items can include his stocks, bonds, valuable family heirlooms, bank savings, or even his home. In order to avoid piercing the corporate veil of your LLC, you’ll need to follow certain legal guidelines. Even if a judgment is filed against your LLC, the court won’t be in a position to pierce the corporate veil as long as you comply with these guidelines.
You must observe corporate formalities, as an LLC owner. These formalities include constructing and consistently updating an operating agreement, distributing membership certificates, keeping a membership transfer ledger, and holding annual meetings of both members and managers. Fortunately, you’ll not have as many corporate formalities as S-Corp or C-Corp business entities. However, you’ll still be required by law to follow those that pertain to your LLC through both state and federal regulation. Failure to do so will be grounds for piercing the corporate veil.
So, what does that mean?
To recommend the right attitude in the area of ethics. Organisation’s objectives should therefore be attuned to meet an accepted code of corporate conduct with the rise of corporate governance and corporate social accountability in the new business environment. Failure to do so, can impact harmfully on its performance. Consistency to ethical values doesn’t come cheap. However, the corporation stands more chances to succeed in its industry because it will be accepted within the community during its values and good status.
It Makes You Wonder..
Document all of the business undertakings of your LLC. Keep a record of all business transactions, investing processes, and spending. Also, keep track of major business meetings and final decisions. Keep good records of all company contracts, signed deals, covenants, arrangements, and all other formal written agreements. Keep all of your formal business documents safe and well-organized for a period of at least seven years.
Make sure to arrange and conduct formal meetings with all of the members and managers of your LLC. Keep the meeting minutes from every one of these meetings. The minutes should consist of discussions pertaining to corporate issues, daily business dealings, declaration of dividends, mergers approvals, issue of shares, sale of assets, fund deposits, audit reports, and financial statement. You should also document the duties and the holding of the members and mangers as they occurred during the meetings. As a note, if done properly, you’re permitted to maintain minutes through a written minutes of the meetings, or managers and shareholders can unanimously take the minutes without a meeting. Either way you’ll still be in accordance with your states corporate regulations.
As much because it is a simple and straightforward concept, there are still thousands if not hundreds of thousands of LLC owners who engage in fraudulent business practices. Fraud is usually intentional with no regard for either the law or the public at large. Although, this is a no-brainer and shouldn’t even be a subject of discussion for the civil-minded, the issue of fraud still needs mentioning. In a word, do not commit fraud. It’s an egregious act that not only causes financial and emotional damage, but can ruin innocent lives as well. So please, avoid it at all cost as you would a rattlesnake.
You must avoid commingling business and personal assets, as a business owner of any sort. Commingling is done by either depositing business funds into your personal bank account, or the reverse. Doing either is a serious issue, and will get you into lots of legal trouble. Needless to say, your LLC will very probably get pierced by a judge. Keep business and personal assets separate. Any funds that are to be used only for business should only be removed from the business. Likewise, any personal business should be conducted through your personal bank accounts. Open a separate business checking account. Obtain business credit cards to free up some of your corporate money. Keep track of all of your business transactions such as expenditures, deposits, and investments. In a nutshell, maintain all business and personal assets separately.
You always want your business to become familiar and easily identifiable to the general public so that it reaches its target and ultimately makes money. Also, you need to show that your business is in good standing, and is freely operating under the law. Therefore, make certain to market your LLC through word-of-local newspaper, mouth, or online advertising. Design and create business cards displaying your business name, your legal name, logo, and business address. Create letterhead bearing your business location and contact information (and create business envelopes as well). Generate invoices in the name of your LLC to send to your clients. Make sure to keep records of the benefits and losses, and file your corporate taxes by March 15 of every tax year.
Your business must have capital in order to survive. Your business will suffer a lot without it. Worse, if it is sued, is not able to satisfy a court-order judgment, and is then found to be undercapitalized or zero capitalized; it can end up with its corporate veil pierced. Therefore, you must make absolutely sure that your LLC is adequately capitalized. There are a series of way to capitalize your LLC. You can do so by investing your own money, using private funds from family members, starting a joint venture relationship, or securing a business loan. There are no percentage or average capitalization requirements. However, you should always keep you business in the black with adequate capitalization. Doing so will keep you out of corporate and legal hot water.
These are some basic steps that you must follow in order to prevent piercing the corporate veil and maintain personal asset protection for your LLC. If you comply with all of these and other articles pertaining to your state, you’ll be in good corporate shape, and will operate your business without any type of unwanted legal downfall.