What Is the Corporate Veil?
The phrase "piercing the corporate veil" refers to the removal of the legal separation of shareholders and the corporation itself. In essence, the corporate veil is the legal standing in which you're protected from the liabilities and debts of your business.
Simply speaking, this "veil" is recognized as a legal division of your personal assets and self from your business.
What Happens When a Piercing the Corporate Veil Occurs?
Corporate veils are only pierced when the shareholders or owners use the corporation in a fraudulent manner, or they fail to separate the business assets from their own. As a business owner, it is possible to pierce the corporate veil by not adhering to the formalities of owning a corporation. This can be something as simple as:
- Not updating company bylaws
- Failing to hold annual meetings
- Not maintaining a stock ledger
- Failure to document business actions
- Not keeping business financials separate from personal financials
- Utilizing personal assets as part of the business
Fraudulent activities can range from the transfer of assets to another company that a shareholder owns, or misrepresentation of financials to lenders to obtain financing.
As a business owner, it is very important that your corporation follows all of your state and local laws and requirements. We provide a way to incorporate, create bylaws, and ensure corporate compliance to reduce the possibility of piercing the corporate veil.
Loss of Protection
The courts are very cautious to hold business owners or shareholders liable for the debts of their business. As such, proof will need to be provided that shows your company has pierced the corporate veil. Once this proof is provided, you'll be held liable for any debts your company may have.
Innocent parties that were not part of the fraudulent activities or wrongful acts are not held liable. Public companies, for instance, that pierce the corporate veil will not have all shareholders held liable for the debts incurred. Instead, only those that were responsible for the activities that pierced the veil will lose their legal separation of the business and their own personal assets.
Once the veil has been pierced, any responsible parties can have their personal assets taken from them to reimburse creditors or to satisfy any judgments a lawsuit may bring.
Piercing the veil is a serious matter that will require the assistance of a lawyer. Whether you're trying to make a judgment against a company and you're claiming they pierced the veil, or you're facing claims of piercing your corporate veil, a lawyer will be needed.
Protection against losing your corporation's limited liability status will require diligent following of the responsibilities of your corporation. An accountant or lawyer can ensure that your business does not pierce the corporate veil and that all of the legal responsibilities your business must adhere to are adequately met.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.