What does it mean to have your corporate veil pierced?
The veil of limited liability is the legal protection a person or people get when they form an Oklahoma corporate or limited liability company. The company has a separate legal existence, it can own property, make contracts and generally conduct business.
When you hear the phrase “piercing the veil” that means a court is considering taking the protection you receive from having the corporation or limited liability company. If it happens, all of your personal assets could be at risk.
There are certain things that you, as the business owner, can do to maximize the chances that your shield of limited liability will hold up. Read on to find out the steps.
Whether you are a corporation shareholder and limited limited liability company member and/or manager, consider the following:
• Don’t be evil. Do not use the entity to assist the owners in lying, cheating, or stealing. Under the old legal maxim of “bad facts make bad law,” a court might ignore the law where the it believes that justice requires relief.
• Follow rules Maintain formalities where possible. Formalities (including minutes) are required of corporations, but are advisable with LLCs.
• Have management manage. The law provides certain obligations on the persons designated to manage the entity. When non-managers assume the manger’s rights, a court is more likely to be convinced that the form of the entity should be disregarded.
• Keep it separate Provide for financial segregation and do not allow personal use of entity funds. Even in the case of a single-member LLC, the entity should have its own tax identification number and its own bank accounts, which are identified and used for business expenses.
• Adequate capital. Ensure that the entity is adequately capitalized for its intended business. Where there are excessive amounts of debt compared to a nominal amount of capital, a court is more likely to be convinced that the form of the entity should be disregarded.
• Documentation. Where there are loans, ensure that they are timely and properly documented and that they are treated in accordance with the documentation. Where the entity and its managers ignore the contractual requirements for a loan, a court also may be inclined to do so.
If you have any questions about these things for your company, let me know. If you have like these tips, sign up for more to be delivered straight to your email inbox: