One of the greatest benefits that having a corporation can offer is by offering the corporate veil. Legalzoom reviews and the like point out that the corporate veil is one of the primary devices which shields directors, owners, and shareholders of a corporation from being forced to use their own personal resources when the corporation creditors come knocking.
However, the protection that the corporate veil offers can be pierced when certain factors are present. While specific laws vary from state to state, these are the general factors which are considered if a creditor attempts to cut through this protected status to take away personal assets in satisfaction of a corporate debt. You will want to check with an attorney or your state specific corporation laws to learn the precise requirements as some of the factors can be extremely specific.
Factors for Piercing the Corporate Veil
- Whether or not this is a close corporation. Close corporations are privately owned with less than 50 or so shareholders and only privately traded.
- The corporation is under capitalized, meaning it doesn’t have enough money and may also have too much debt. This may also apply in situations when there is more debt than income.
- The corporation has ignored corporate formalities such as recording minutes, hosting regular business meetings, and following the state’s corporate compliance laws.
- Fraudulent representations have been made of some kind or another to an innocent party.
- The shareholders, directors, officers, and other significant persons in the corporate share numerous roles, which is quite common in close corporations because they are so small.
- Corporate and personal funds are mingled in the same account.
- Corporate records are not maintained.
- Individual or personal debts are being paid out of corporate funds.
What to Watch For
Some of the most common pitfalls for close corporations according to Legal Zoom is the adherence to corporation formalities. It can be difficult to keep all of the funds separate while at the same time keeping up with corporate meetings and maintaining the records. Avoiding fraudulent misrepresentations on the other hand is not so difficult so long as you have a scrupulous corporation. And it can be easy to think that once or twice failing to follow the corporate requirements. But don’t risk it. Keeping up with the small things will help protect you in the long run from the big things.
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