Setting up your business as a corporation or limited liability company (LLC) is a crucial way to protect your personal assets from debts and other liabilities incurred by your business.
The ability of a corporate entity, such as an S Corp or LLC, to separate and safeguard your personal assets is often referred to as creating a “corporate veil.” When properly created and maintained, the corporate veil offers you vital personal liability protection from creditors, lawsuits, and other business disputes.
That said, the personal liability protection offered by these business entities is not absolute. Indeed, there are several circumstances in which a creditor can come after your personal assets to settle a claim against your business. When this happens, it's known as “piercing the corporate veil.”
And though the corporate veil can be pierced if you commit fraud or intentionally misuse the protective status offered by these entities, most of the time it happens due to innocent mistakes, such as inadvertently mixing your personal and business affairs.
To ensure your personal assets are safeguarded from liabilities incurred by your company, here are three key ways to help keep your corporate veil intact.
1. Observe corporate formalities
One of the most important ways to keep your veil intact is to strictly adhere to all formalities your corporate entity is required to follow. Whether this is filing an annual report, adopting corporate bylaws, or keeping detailed records (minutes) of meetings where major business decisions are made, it's vital that you're aware of and abide by these obligations.
Required corporate formalities vary by state, with some states requiring much more than others. If these formalities are not properly observed, a court can remove the corporate veil, leaving your personal assets vulnerable to business creditors. To help prevent this, we offer maintenance packages specifically tailored to our state's laws, which make adhering to these requirements as simple as possible.
2. Keep your personal and business assets separate
To keep the corporate veil intact, you're required to keep your personal and business finances totally separate at all times. If not, a court can claim your business entity is nothing but a shell and remove the corporate protection shielding your personal assets.
This means you should not only maintain separate bank accounts for your company and your personal finances, but you should never use corporate funds to pay for personal expenses, such as your mortgage or credit card bill. Even depositing a check made out to your business into your personal account could be considered a violation, so avoid commingling your own finances with those of your company at all costs.
When you work with us, we perform regular reviews of your company financials to be certain everything is being kept totally separate and your personal assets are protected.
3. Consider wisely whether to cosign a business loan or use personal assets as collateral
If you're like most entrepreneurs, you probably don't have access to a lot of startup capital. Given this, you may decide to take out a business loan to get your operation off the ground.
However, if you cosign on a business loan or personally guarantee a financial obligation for your corporate entity, you share responsibility with the company for paying it back. And if you default on the loan, business creditors can come after your personal assets to settle the debt.
Similarly, when taking out a business loan, if you put up any personal assets like your home as collateral, the property you use can be seized and sold to pay off your business creditors.
Keep the veil intact
With all of the different rules and requirements surrounding corporations and LLCs, you should be diligent about ensuring you're not opening yourself up to be personally liable for your business debts. All it takes is one mistake to pierce the protective veil.
We offer a complete spectrum of legal services for business owners and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer you a LIFT Your Life And Business Planning Session, which includes a review of all the legal, insurance, financial, and tax systems you need for your business. Schedule online today.