How to Protect Your LLC & Avoid Piercing the Corporate Veil
Let’s begin with a definition of “LLC (limited liability company).” “A corporate arrangement in the United States. In which the owners of a company are not liable on a personal level for their company’s liabilities. They’re also not liable for debts of any kind. Limited liability companies are dual entities. They have the attributes of a corporation. Those attributes get combined with attributes of a sole proprietorship or a partnership.”
You’ve got to be certain that your LLC gets protected at all times. One of the best ways to protect it is to not let the corporate veil get pierced. What does “piercing the corporate veil” mean? It’s a legal phrase that describes a corporation’s owners losing hold of limited liability. That’s the liability they had due to owning the corporation. When this takes place, the owners’ personal assets can end up paying for business debts. The assets can also pay for many different liabilities. Do not assume this concept applies to only corporations. Any business that goes out of its way to provide limited liability to its owners could get affected. These businesses are risk of piercing the corporate veil. This happens when owners don’t take necessary precautions. They must ensure that they have adequate protection in place.
LLCs and corporations are always separated from the owners by law. Due to this, the owners’ assets remain separated from the business’ assets. This is one of the top reasons why people form LLCs in the first place. Or why they incorporate their businesses. It’s for personal asset protection. But be careful. Protection is never guaranteed. You must be accountable and take responsibility to ensure that protection remains.
6 Steps to Avoid Piercing the Corporate Veil
As the owner of a corporation and LLC, you must take aggressive action. Action that proves your business is separate from owners. Here are the key steps to do so:
1) Take part in all required formalities.
When it comes to corporations, there are strict formalities that you have no choice but to follow. LLC requirements are a bit more lenient. But it’s best to follow the same steps that you would while handling a corporation.
-Corporations: Here are the main formalities to consider. First off, you must always update all the bylaws that you create. You’ve also got to issue stock shares to the corporation’s owners. These owners count as shareholders. You should maintain transfer ledger for each stock. Issues such as these are why initial and annual meetings are so important. The meetings should include all shareholders and directors. Be sure that you take care of all annual filings that the state of incorporation requires. Don’t procrastinate. Knock it out as fast as possible. Filing fees are an annoyance but it’s best to not let them bother you. Pay them as soon as possible. Also, pay your corporate taxes.
-LLCs: There are plenty of formalities for LLCs too. Like your corporation, you should take care of any annual filings. These filings get required by your state of corporation. Do so as fast as you can. Don’t forget to pay all the filing fees. Here are some more recommended formalities that you can’t afford to lose sight of. Be sure to create and update an operating agreement. Also, make sure that all owners receive their membership certificates. It’s best to keep a membership transfer ledger. Like corporations, you must hold initial and annual meetings with all members present. If your LLC gets managed by manager(s), then those manager(s) must also be present in the initial and annual meetings.
2) Document all the actions of your business.
Be sure that you document all the major decisions of the business of your LLC. All major meetings that you hold should also get documented. Here’s an example of this. Sign and keep every single contract that your company takes part of. Put it in writing whenever you hold your initial and annual meetings. All shareholders (corporations) and directors must be present. Also, put it in writing that managers or members (the LLCs) are present. Never throw away your formal business documents. Store them in a safe place in which you know that other people won’t throw them away. Hold on to those documents for at least seven years.
3) Never mix your business assets with your personal assets.
The assets of the owner(s) must always be completely separate from your business assets. If you have a business credit card, only use it for business expenses. The same concept applies if you have a business checking account. Also, be sure that you keep different forms of assets separate. For example, separate property from equipment.
4) Make sure that your business capitalization is enough.
To begin and continue operations, your business needs three key things. Money. Equipment. Items. Don’t panic over this. There are many ways to go about this. Here are the three most common ways. 1. You can use your own money. 2. You can accept money from other people. If you do this, you’ll have to classify each person as a business owner. 3. You can get money from a business loan. Put a lot of thought into how you choose to get adequate capital. Without it, your business will get doomed for failure. Whatever route you take, the capital must get designated to your business. It cannot get designated to you.
5) Make sure that your LLC status/corporate status is obvious.
Let the world know that you have an LLC or corporation. One easy way to go about this is to create business cards. The cards should display the name of both your LLC and corporation. Also, let your corporate or LLC status get known when you make purchases. Always pay invoices with a business credit card or business checking account. When you create invoices to send out to clients, always use the company name. Also use your company name when signing any documents, leases, or contracts.
Teach your managers and company officers to always execute contracts. They should also execute other business documents in their true capacities. For example, they should sign documents in the following manner. “Jane Doe, as President of the XYZ Corporation.” In that example, Jane Doe is not signing her name in a personal manner. Instead, she’s making it very clear that she’s president of a corporation.
6) Follow all the particular rules and regulations of your state.
For example, be sure that you file annual and biennial reports on time. Reports such as these need to get filed with the Secretary of State. Make sure that all your assumed business names become known to the Secretary of State. They should also become known by the county records offices.
A lot of businesses operate in many states. If yours is one of them, register your business in every single state. Figure out which office or state agency you need to file with in all your states. You should go out of your way to learn all the requirements in any state that your business operates in. You and the higher-ups of your business should know these rules and requirements. In fact, you must know them like the back of your hand.
Keep this in Mind to Avoid Piercing the Corporate Veil
Your corporate veil will get pierced If a judge isn’t able to make an obvious differentiation. The judge must see what belongs to an owner versus what belongs to a business. Your situation will worsen if the owners are unable to submit proof. Proof of what? That they followed all formalities. If this is the case, the judge can decide that you acted like a sole proprietorship. Or, the judge can classify your business as a general partnership. Remember, the judge needs to see that, instead, you have acted as an LLC or corporation. If the judge doesn’t realize this, he or she can pierce the corporate veil. When this happens, your personal assets will get awarded to others. Any plaintiff that the judge chooses can receive those assets. That’s why following the steps of this article is so important.
There’s a lot of money at stake in business. You must protect that money at any cost. Here’s an example of how to protect it. Say the owner of a business invests $20,000 in his or her LLC. A year later, that LLC suffers a liability that is worth a lot more than the current income and assets. It’s possible that business owner may lose his or her $20,000 investment. But there’s a silver lining in this. When the corporate veil gets protected, the owner’s assets and personal income are safe. They cannot get subjected to the LLC’s unfortunate liabilities. The owner followed the steps in this article and took necessary precautions. Because of this, the business owner gets protection. Thanks to the LLC. All the risks that come with operating a business got avoided.
Rules and regulations are a hassle. But it’s better to deal with minor hassles like signing documents and separating assets. Why? The alternative is having your corporate veil pierced. That’s a major hassle that you should avoid at all costs. Keep the steps of this article in mind to ensure that you are always protecting your assets.
Disclaimer: This article is for entertainment purposes only. It is not intended to offer any legal advice.