As a law firm, we’ve seen far too many businesses burr the lines when it comes to personal and company expenses. This is one way businesses unknowingly pierce the corporate veil. They can leave themselves personally liable for any business claims or debts.
In this article, we’ll explain what the corporate veil is and everything you need to do as a business owner to avoid piercing it.
What is the Corporate Veil?
Corporations and limited liability companies (LLCs) exist separately from their owners. As a result, business assets are separate from owner assets. If one of the business’s customers or clients brought a claim against the business and the business needed to pay debts or damages, the business owner’s personal assets cannot be touched. This is due to the fact that the business and the person exist separately. This protection is called the corporate veil. It acts as a veil between the business owner as a person and the business itself. Now, to consistently have access to this level of protection, a business must maintain proper corporate form.
What is Proper Corporate Form?
To be protected by the corporate veil, they must maintain proper corporate form. All of the purchases must be business-related and they must check the following boxes:
- The business is officially registered with the Secretary of State.
- The business has an up-to-date operating agreement.
- The business has a separate bank account and credit accounts.
What Does “Piercing the Corporate Veil” Mean?
Piercing the Corporate Veil means a business has violated one or multiple items from the previous section above. If your business registration expires or you do not have an up-to-date operating agreement, you could be at risk of piercing the corporate veil.
The most common way businesses pierce the corporate veil is by violating #3. They fail to separate personal and business bank account or they use business funds for personal use. For example, if the owner of a business uses company funds as a personal piggy bank for groceries, vacations, or paying for their kid’s tuition.
Another way businesses pierces the corporate veil is by directly committing fraud. If the owner directs, instructs, or conducts a fraud that the company hides for the owner’s benefit, the owner could be personally liable for that fraud.
Want Legal Support Navigating All Things Corporate Veil?
If you are a Georgia-based business and want to ensure your business is maintaining corporate form and not at risk of piercing the corporate veil, book a strategy session with us here and we’ll support you through the process.
Looking for more legal know-how to protect and empower your business? Join The Driveway, our monthly legal membership program. Check it out here!
