LLC Corporate Veil: Everything You Need to Know
Piercing an LLC corporate veil is a term used when a creditor is able to sue the business owners of an LLC.3 min read
Piercing an LLC corporate veil is a term used when a creditor is able to sue the business owners of an LLC. In general, business owners enjoy the protection of their personal assets from business liabilities due to their forming of the LLC. This protection that LLC owners enjoy from their corporate entity is referred to as a corporate veil.
It is important to note that simply forming an LLC does not automatically protect you from all personal liability in the business. There are some situations where a creditor has been able to pierce the corporate veil including:
- The company is considered severely undercapitalized.
- The owners of the company have not kept their personal and business affairs and accounts separate.
- The actions that the company engaged in were deemed wrongful or fraudulent.
How Can You Maintain Your Corporate Veil?
There are ways for business owners to ensure that their personal assets are protected from business debts. To help keep your corporate veil intact you will need to:
Start-Up Your Business With Adequate Capital
If you start your business without enough capital to be able to cover your expected liabilities, your creditors could argue that you should not be given the protection of a corporate veil since there was not sufficient separation from the owners.
To avoid this complication, you will want to make sure that you make a substantial initial investment in the business to be able to dispute this claim. Even though money can be tight when starting up a business, you will need to make a judgment call on how much money you will need to cover your initial start-up costs and liability. This includes making sure that you have enough to pay your creditors and other third parties you will owe money to.
Being solvent, in the beginning, will help reduce your risk of veil piercing. To provide money to start your operations and purchase any necessary equipment you can:
- Fund it with your own money
- Accept money from other people and give them a portion of the business
- Acquire a business loan
Keep Financial Affairs Separate
It is vital to keep your business financial accounts separate from your personal accounts. Open a business bank account and apply for a credit card in the name of your business for expenses. If you need to use money from your business account, make sure that you officially pull it as a recorded draw instead of simply paying your personal bills from the account.
When the owner wants to add additional funds to the business you need to make sure to document it as a capital contribution to the company and provide the appropriate documentation when the transaction occurs. Make sure to maintain a book of accounts in which you document all of your business expenses. There are many good small business accounting programs.
Sign All Documents Correctly
When completing any dealings for the business, you will want to make sure that you sign for it in the name of your company. You should sign your name along with the name of the company for clarification. For example, sign all documents and paperwork, John Doe, Authorized Member of 123 LLC. This will reflect that the signer is authorized to sign on behalf of the company and the company is also the responsible party. This will help you establish a separation between your personal affairs and your business.
Document All Company Business
You should always follow the guidelines for meetings that have been established under your LLC's operating agreement. You will need to document your minutes formally and maintain professional records. Any decisions that the company makes should be formally recorded and signed by all the members as well. Maintaining business formalities is vital to creating a separation between the business entity and the owners and keeping your LLC corporate veil intact.
In effect, this paper trail will help prove that your business operated as its own entity and was not simply created as a form of liability protection for its owners. You should maintain all of this business documentation for at least seven years.
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