Lifting The Veil Meaning: Everything You Need to Know
A good lifting the veil meaning is a company that loses its liability protections, and this could apply to corporations or LLCS. 3 min read
Lifting the Veil Meaning
A good lifting the veil meaning is a company that loses its liability protections, and this could apply to corporations or LLCS. An LLC or corporation entails a legal entity that’s separate from its owners. This means that owners cannot be held liable for any business debts that a company incurs. However, there are cases where the courts may get around such protection if a business owner commits some type of malfeasance.
For instance, if owners mix personal and business assets, a judge may pierce the corporate veil by holding owners accountable for business obligations or debts. There are other cases where the courts may pierce the corporate veil, and you should know the rules of your state to ensure you’re in full compliance with the law. Judges may also remove liability protection in cases where the distinction between the shareholders and business becomes blurred.
Chances of Piercing the Veil
With that, the courts are usually reluctant to remove such protections and will only lift them in case a statute was violated in some manner. As a starting business owner, you can take advantage of the same protections as the largest corporation, so long as you register the entity with state authorities. If you wish to register a corporation, for instance, you must file an articles of incorporation document, and an LLC registration entails the submission of an articles of organization.
The type of entity you choose depends on your business goals, but keep in mind that an LLC offers more flexibility than corporations in terms of management, paperwork filing, and state guidelines. Regardless of your choice, LLCs and corporations offer the same limited liability protections. However, the courts can remove your limited protection for both entities in certain cases. Limited liability protections mean that creditors cannot petition for your personal assets if they wish to gain payment for business obligations and debts. Corporations are older than LLCs, and LLCs were created to give small business owners the same liability protections as corporations.
Essence of Corporate Veil
Lifting the corporate veil essentially means that the courts have disregarded a corporate personality and looks straight to an owner or owners for accountability. If fraud or any other criminal activity occurs, owners cannot invoke limited liability protections. However, members or shareholders of a business may still not be held accountable for the acts of a business, even if that person holds the entire portion of a company’s capital.
When running a business, all assets and money belonging to the company qualify as business assets that cannot be seized by creditors. The notion of separating a legal business from the shareholders is called a veil of incorporation. Also, be aware of the following exceptions:
- Prevention of improper conduct or fraud
- Determining the character of business
- If the business is found to be a sham
- Companies avoiding legal obligations
- In cases of semi-criminal cases
- Business acting as a trustee or agent of shareholders
- Safeguarding of revenue
Common Veil Methods
The most common form of piercing the veil you’ll come across involve close corporations. The laws vary by state, but you should know that the courts tend to only remove protections in serious criminal offenses. The same standard applies to LLCs. Take note of the two methods in which a business becomes a liability under corporate law:
- Direct liability, epically regarding direct infringement
- Secondary liability in the form of indirect violation from agents
Be aware of two theories regarding the lifting of a corporate veil:
- The alter-ego of the self-theory
- The instrumentality theory
The alter-ego theory entails the distinct nature of corporate parameters between the shareholders and the corporation. The instrumentality theory assesses the use of a company in ways that are beneficial to an owner instead of a business. The courts may decide to invoke one or both theories when analyzing a case. Even if the corporate veil is pierced, keep in mind that you would only be held liable for your share within the company. If you’re looking for other ways to maintain your limited liability protections, take such precautions of establishing a business bank account to separate personal and business assets, and do not take out personal loans for the business, as you would be personally liable for any loans taken out in your name.
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