What are key steps to take to minimize the piercing of the corporate veil?

A corporate veil insulates the personal assets of shareholders of a corporation (or members of a limited liability company) from the assets of the corporation, thereby protecting such assets from claims against the corporation. Without this shield, if a corporation has creditors, the creditors can proceed against the individual owners whose assets will be subject to collection.

In order to ensure that a company owner’s personal assets are protected, one must be able to show that the corporation exists and operates on its own and not as an alter ego of its owners.

There are some key steps to take to minimize the likelihood that a court would pierce the corporate veil of the business:

1. Observe corporate formalities

• Prepare resolutions/consents for corporate actions

• Have and update by-laws

• Maintain stock or membership ledgers

• Hold initial and at least annual meetings of directors/managers and officers;

• Maintain status with NYS by filing annual reports and paying fees, etc.;

• Document business activities and store records adequately

• Operate under the formal corporate name

• Sign all documents/contracts under corporate title

2. Avoid commingling of accounts, funds and assets

• Ensure that the corporation has its own bank accounts

• Ensure that the corporation is adequately capitalized. Each corporate account ought to have sufficient funds for the corporation to function in its daily activities.

• Do not operate out of personal or individual bank accounts; keep corporate funds in the corporate account and do not put any personal funds in the corporate account or vice versa

• Do not share financial obligations; do not take or give loans from or to the corporation

• Do not use corporate credit cards for personal use and vice versa

• Do not use any corporate assets as though they are individual assets

• File correct and appropriate tax returns for the business

3. In the case of multiple companies owned by the same owners or set of owners:

• Each company should have its own organizational documents

• Each company should have its own bank accounts

• Each company should have its own employees

• The companies should not operate out of the same facilities

• Each company must be independently and sufficiently capitalized to fulfill its obligations.

The idea is to put as much distance between the business owners individually and the corporation as possible. These steps help to do that.

For more information about this article or other issues, please contact us The Bachman Law Firm PLLC at judith@thebachmanlawfirm.com or 845-639-3210.