Piercing the Corporate Veil
With so many people starting their own businesses now, it is essential that they get proper advice in setting up the companies to ensure that they don’t end up with issues later on in the life of the company.
Many people like to form corporations because of the limited liability for shareholders. Limited liability means that the shareholders are liable, meaning they can lose, only the amount of their investment. Thus, if the corporation owes $200,000 but only has $100,000 in assets, you as the sole shareholder will not be personally liable for the extra $100,000 owed to the creditors. That means that the creditors can only get the money that is actually in the corporation.
Small nonpublic corporations need to be careful when setting up the corporation to ensure that creditors can’t come back and pierce the corporate veil. This means that the creditor claims that the corporation is just a veil to protect the shareholder and would allow the corporation to be put aside and the creditor could then go after the shareholder to get payment for money owed.
To prevent a creditor piercing the corporate veil, corporations need to do the following:
1. Observe corporate formalities - hold shareholder meetings
2. Do not co-mingle corporate funds with the shareholders private funds - get a separate bank account for the corporation
3. Control of shareholders over the corporation - better to have more than 1 shareholder and vote for important decisions
4. Shareholder can’t borrow corporate funds without a contract to repay - don’t move funds between corporate and shareholder accounts without paperwork to show a business reason for moving the money
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