609.799.0528
Strong Advocacy, Trusted Advice
Representation Tailored to Your Needs

News & Opinions

Sunday, October 2, 2011

Avoid Piercing the Corporate Veil

Many business owners establish corporations to shield themselves from personal liability for business debts and protect their personal assets from creditors of the company. When established and maintained properly, a corporation is treated under the law as an independent entity, with many of the rights afforded to individuals. Such rights include the ability to own and transfer property, enter into contracts, obtain funding and to initiate legal action. A corporation is a separate, distinct entity, apart from its shareholders; as a result, only the corporation’s assets can be seized to pay judgments or satisfy other debts owed by the company.

However, business owners can lose the liability protection afforded by the corporate business structure through simple, common mistakes. Certain corporate formalities must be observed in order to preserve the corporation’s status as a separate entity apart from its owners. Failure to comply with these requirements may permit creditors to “pierce the corporate veil” and seek payment from the individual shareholders directly.

To ensure the corporate veil remains intact, the corporation must act like a separate and distinct entity, and the shareholders must treat it as such. If certain corporate formalities are not consistently observed, a court may find that the corporation is merely an “alter ego” of the individual owner(s), and the corporate structure may be “disregarded”. When this occurs, the corporate veil is pierced and the individual shareholders can be held personally liable for the debts of the company.

The most frequent mistake owners of small corporations make is commingling of assets. The corporation and the shareholders must treat themselves as separate entities. The corporation should have its own bank and credit card accounts. Business owners should clearly document and account for expenditures made from corporate accounts if they were for personal benefit. In other words, do not use the corporation's funds for other than legitimate company expenditures.

The second most frequent mistake is to forget to keep up-to-date corporate records. Often, business owners will engage in certain actions - such as buying or selling a building or taking out a loan to purchase machinery - without noting in the corporate minutes that such actions were approved by the corporation. The corporation’s financial and corporate records must be documented. Most states also require that the shareholders and the directors meet at least once per year. A record of these meetings, in the form of minutes or written resolutions must be properly executed and maintained by the company.

The benefits associated with the corporate structure are manifold. But, as is frequently the case, these benefits can be lost by failing to "play by the rules".


Archived Posts

2018
2017
2016
2015
2014
2013
2012
2011
2010
2009



© 2018 Law Office of Randall P. Brett | Disclaimer
214 Carnegie Center, Suite 100, Princeton, NJ 08540
| Phone: (609) 799-0528

Business Law | Employment Law | Civil Litigation | Traffic Court

Law Firm Website Design by
Design by Zola Creative