When you choose to form your business as a corporation, likely one of your major reasons is that a corporation protects you and your assets from liability regarding corporate debts or when someone obtains a judgment against the corporation. This is called the “corporate veil,” meaning that states and courts recognize you and the corporation as two separate legal entities rather than the corporation being your personal alter ego. In other words, a veil of protection surrounds you.
This veil, however, can be pierced in some situations. Piercing the corporate veil means that a court sets aside the limited liability that you, the other shareholders and the corporation’s directors enjoy and holds all of you personally responsible for the corporation’s debts or actions. Fortunately, courts seldom pierce the corporate veil unless your corporation does something egregious.
Preventing Piercing of Your Corporate Veil
As you already know, the state in which you incorporated has its own rules and regulations regarding corporations. You need to scrupulously follow those rules and regulations in order to maintain your corporate veil. For instance, as a Montana commercial litigation lawyer from Silverman Law Office, PLLC explains, your corporation must do the following:
- File all required documents when due.
- Maintain a registered agent, not only in your corporation’s state of formation but also in any state where your corporation is authorized to do business.
- Hold required shareholder meetings (most states require an annual meeting) and take and keep minutes of their proceedings and the decisions made.
- Keep detailed corporate business and financial records.
- Properly capitalize the corporation.
- Distribute profits, i.e., dividends, only to shareholders and in the proper amounts.
- Maintain corporate bank accounts.
- File a corporate tax return each year.
- Never commingle anyone’s personal funds with those of the corporation.
- Make sure your website, invoices, purchase orders, advertising and all other sources give clear notice to the public that the business is a corporation.
While these and other corporate formalities may be burdensome and time-consuming, they are crucial. Experts estimate that 50% of today’s piercing corporate veil lawsuits succeed because corporate owners don’t properly adhere to their respective corporate formality requirements.
Need for Continuing Legal Help
Considering that the corporate veil is the only protection you and other shareholders and directors have against personal liability, it goes without saying that your corporation needs constant access to and input from an experienced local business lawyer. If you’re a relatively small corporation, you may wish to consider hiring such a lawyer as your outside legal counsel. If you’re a large corporation, your better option likely is to establish a legal division within the business.