What Is the “Corporate Veil,” and Why Is It So Important To Keep It Intact?

After forming an LLC or incorporating your business, you need to maintain separation between your personal dealings and those of your business. Fail to do so, and it could cost you—professionally and personally.

The legal distinction between your company and you as an individual is often referred to as the “corporate veil.” If you have not donewhat you need to do to legitimately keep that separation intact, a court may “pierce the corporate veil” that protects you from the financial or legal liabilities of your business.    

Consequences When Your Corporate Veil Is Pierced

If your corporate veil is pierced, you (and any other owners of your business) may become personally responsible for damages in lawsuits against your company and paying business debts. Therefore, your home, retirement accounts, car, etc. could all end up in jeopardy of being used to settle what your business owes. That’s a less than ideal predicament to find yourself in.

How to Preserve the Protection of the Corporate Veil

To ensure you don’t put at risk the personal liability protection provided by your company’s status as an LLC or corporation, heed the following recommendations:

Follow the rules and complete the necessary paperwork when forming an LLC or incorporating your business.

The requirements vary from state to state and from one local jurisdiction to another, so do your homework to find out what applies to your business.

Some of the necessary documentation and tasks you might have to complete include:

  • Filing Articles of Incorporation or Articles of Organization.
  • Adopting bylaws.
  • Applying for business licenses and permits.
  • Designating a registered agent.

Follow through on the ongoing compliance obligations that apply to your business.

This is critical for staying in good standing with the state(s) in which you’ve registered your company. Just as business entity formation requirements aredifferent depending on where you’ve registered your business so are the rules for staying legally compliant in your state and locality.

Some of the ongoing compliance formalities that you might face include:

  • Renewing licenses and permits.
  • Issuing an annual report to the state.
  • Holding annual meetings for directors and stockholders.
  • Keeping accurate meeting minutes.

Maintain a separate bank account for your business.

And never commingle your personal assets with those of your company. For example, don’t write a business check to purchase personal items or deposit a check made out to your business into your personal checking account.

Don’t personally guarantee a loan or other debt of your LLC or corporation.

This will outright blur—maybe even disintegrate—the line between your business and personal assets.

Don’t let your business become involved in illegal, fraudulent, or reckless activities.

Suppose you, as the business owner, conducted business deals that you knew your company couldn’t fulfill. For example, say you entered into a contract with a vendor for services you knew your business would be unable to pay for. The court might decide that you personally committed fraud, and your personal assets would be fair game as restitution for damages in a lawsuit.

Make it obvious that companies and individuals are dealing with your business entity.

Clearly identify to customers, vendors, suppliers, project partners, investors, the public, etc., that they are dealing with your LLC or corporation and not your personal self. Make sure your contracts, marketing materials, invoices, proposals, and all other business communications reflect your company identity.

Don’t Mess With the Veil!

As soon as you register your business as an LLC or incorporate, you accept the responsibility of maintaining it as an independent entity or face the possibility of some dire legal and financial consequences. To fully understand your obligations under the law, talk with your attorney for guidance. And if you need assistance with the paperwork necessary to preserve your corporate veil, consider requesting the help of an online business document filing service.

With a trusted company keeping track of when compliance filings are due and managing the process for you, you can feel confident your important federal, state, and local requirements won’t slip through the cracks.

Founder of CorpNet
Nellie Akalp is a serial entrepreneur, small business advocate, speaker and author. She is the founder & CEO of CorpNet.com, an online legal document filing service, where she helps entrepreneurs start a business, Incorporate, Form an LLC, set up Sole Proprietorships (DBAs) and keep a business in compliance across all 50 United States.