• IngramLawFirm

Corporate Veil....to pierce or not to pierce

The corporate veil....what is that? Well when you make the decision to establish a corporation it comes with certain protections. Those protections as a whole is what comprises the corporate veil. It is the entire reason from a legal perspective that you establish corporate entities.

The corporate veil allows the corporation to maintain its independent status separate and apart from its shareholders and partners. It is in the eyes of the law a person capable of making its own decisions and choices, have its own bank accounts, assets and debts. This is why it is the ultimate protection a business owner can have and why it is my preferred entity type. The corporation can absorb all of the liabilities of the company and allow you to make choices for buying/selling/leasing equipment, supplies and space. It may provide tax benefits, which should be discussed with your accountant and open up doors for payroll, insurance and benefits for you and your employees. The upkeep is minimal for a closely held company if it is set up the right way and you have the peace of mind as you conduct business that your personal assets won't be on the line if something would go wrong.

But what if you pierce the veil of protection of the corporation. Well that's where things get interesting and a little bit dangerous for the business owner. If you pierce that veil, you are now exposing your self to liability. Yu can do this in many ways, but the most common and troublesome is to not keep a clear distinction between you as a person and you are corporate officer and shareholder. You start to deposit your own funds into the corporate account or use that corporate account as a holding place for your own personal funds. You start to not follow the rules you set up for the corporation at the onset and fail to meet certain deadlines and goals. You use the corporation as a shell for your own personal enterprises that are completely unrelated to the business purpose you have spelled out for the State to avoid personal liability.

As you chip away at the corporate veil, you begin to run the very real risk of the company providing no protection and you to be deemed personally liable for the actions of the company. This is a real and scary problem. If you have a corporation that is doing what it should, meaning is successful providing services and is interacting with the public and there is some suit for liability, you are then personally liable in that suit. It may not be a suit from a customer, but could be from an employee, partner, distributor, supplier, etc. and you will have no recourse to protect your own assets.

If you have taken the smart steps to be a corporate entity, take the smarter steps to work through the legal and financial elements with an attorney and an accountant. Also keep in mind these two professionals have completely different roles and relationships with you, I would avoid either of them if they try to do the job of the other. Basic bottomline, don't have the corporation act for your personally in any way and always think about whether it gives to appearance you're taking advantage of the system, if the answer is yes, probably best to change your course and make a different decision.

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