Asset Protection – The Corporate Veil

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Protect Yourself.  One of the main benefits of incorporating your business is to protect your assets, and those of your business partners.  It is important to realize the ways that the corporate veil may be pierced.  Keep in mind, from the outset:  the courts recognize and respect the corporate structure (which protects your assets).  The courts will not pierce a corporate veil absent special circumstances.

Are You Automatically Safe After Your Incorporate? 

No.  There are ways you can become personally liable for the debts of your company.

1. Undercapitalization.  Here, the corporation is purely a shell:  it has virtually no assets, no accounts receivables, no insurance, and no chance of paying its debts if sued.   All of that said, many new companies have little assets.  Some have mostly debt.  Here, the courts look at whether the company is grossly undercapitalized, before the corporate veil will be pierced.  Our lawyers look at these issues closely and provide advice as you go.

2. Alter Ego.  A corporation has to obey certain formalities.  Most basic to this is the keeping of separate books from the individual owner’s books.   A court will scrutinize (and possibly pierce the corporate veil of) any company account used as the personal credit card of the company’s owner.   Along these lines, to maintain the benefit of the corporate veil (and to avoid personal liability for corporate debts), business owners should hold meetings at certain times and keep “corporate minutes” regarding big decisions.  We also help prepare your corporate minutes so you can maintain certain formalities, to get the benefit of asset protection. Otherwise, the corporate veil can be pierced.

We also check to see whether you have enough insurance.  Why do we care?   One of the ways to pierce the corporate veil is, undercapitalization.  That is to say, if you do not have sufficient insurance to cover certain expected losses, the corporate veil may be pierced, if grossly undercapitalized.

3.  Fraud and Individual Participation.  At times, a person will do something totally wrong, personally, and look to the his corporation for protection.  If, for example, a person runs someone over with his car, or cheats someone out of money, the fact that the guilty person was “incorporated” is of little consequence, except to make both the individual and the corporation potentially liable.   You see, incorporating protects you from your corporation’s debts.  But the owners of the company are liable for their own negligence and fraud.

We make sure that your contracts list your corporation, only, and you as the “disclosed principal.”  That’s key to make the corporation the only signatory, not your personally.  We remain available to provide advice throughout the life of your business.

In fact, we also help you record and organize your corporates minutes for corporate meetings.  Why is all this stuff necessary?   You need to obey certain corporate formalities in order to retain protection of the corporate veil.  Otherwise, the corporate veil can be pierced to make the individual owners of the company liable for the company’s debts.

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