The so-called corporate veil is the legal designation of a limited liability company (LLC).
The LLC designation is what offers business owners protection from legal responsibility for the company. When the corporate veil is not intact, business owners can end up having to use their own assets to pay for their business’s legal expenses.
How Do You Pierce the Corporate Veil?
There are three main areas in which the corporate veil can be pierced. These are documentation, finances, and laws/ ethics.
In order to keep the corporate veil intact, business owners need to take actions to protect all aspects of the corporate veil.
The easiest way to compromise the corporate veil is by failing to document business activities properly. Business owners need to obtain and then maintain an LLC and any other records required by the state in which they operate. Without a properly documented LLC, there is no other entity to be held legally accountable other than the business owner.
To form an officially recognized entity, businesses must complete obtain an EIN (Employer Identification Number); sometimes referred to as a Federal Tax ID; file Articles of Incorporation or Organization; and designate a registered agent. New businesses must also adopt bylaws; designate officers and a board of directors; maintain their operating agreement; obtain other licenses and permits; and file an initial report.
Once the business is established the owner(s) must continue to fulfill compliance expectations by reporting and paying taxes; submitting annual reports; renewing licenses and permits; holding board of directors, shareholder, and LLC member meetings; recording annual meeting minutes; and renewing registered agent information as necessary.
Business owners must be sure to keep their finances separate. This includes but is not limited to establishing a corporate bank account and avoiding making personal purchases with the business credit card. These actions give the corporation independence from the business owner. Failing to maintain this separation pierces the corporate veil because in the eyes of the court, the business may exist as a front for the individual’s financial activities.
Law and Ethics
Business owners cannot allow their businesses to become entangled in illegal activities. A business cannot commit a crime in the sense that a person can. Thus, if something unlawful is occurring, a person within the organization can be held responsible. Consequently, when a business breaks the law, the person within the business who led the business to break the law may be found responsible.