There are many reasons to have a company instead of running your business as yourself, but the most often stated primary reason is to protect yourself personally. The “corporate veil” is what protects the
individuals who own a company so that liability can only attach to the company itself, and not to the owner(s) of the company.
In law, a company is just like a person in that it can sue and be sued. The company’s assets and liabilities are different from the owner’s assets and liabilities.
Companies can take multiple “forms,” including a Corporation, Limited Liability Company, Professional Limited Liability Company, Professional Corporation, and a variety of others. These forms all have distinct characteristics, but all are generally required to be “organized” as one or the other form and registered with the Secretary of State.
Forming a company is not a difficult process, but governing a company so that the corporate veil is protected is too often something ignored or improperly considered too difficult. If, for example, a company’s employee harms someone while in the course and scope of their job, the company can be liable. In this case, one problem could be if the amount of liability is greater than the company’s value. Another problem could be that the company has not protected its corporate veil, and the company owners could risk losing their personal assets.
The Corporate Veil
The legal maneuver for getting at a company owner’s assets is called “piercing the corporate veil.” Because corporate law is generally a state-level function, each state has its own set of statues and case law dealing with what must be demonstrated to pierce the corporate veil.
Generally, by default, a company’s owners are not liable for the company’s actions and liabilities, but if properly requested, a Court would consider assessing liability to a company’s owner(s) personally based on considerations and questions such as the following:
Was the company undercapitalized?
Does the company keep its own, separate books?
Are company finances kept separate from owner(s)’ finances?
Are personal bills paid by the company, or vice versa?
Are corporate formalities followed, such as annual meeting documents?
Does a parent company own all of the subsidiary company stock?
Does the parent and subsidiary have the same directors, officers, management?
Does the parent provide all the financing to the subsidiary?
Is all or most of the subsidiary’s business derived from the parent?
Does the parent refer to the subsidiary as a division or department?
Do the subsidiary’s officers and directors take order from the parent?
Does the parent and subsidiary follow all corporate formalities for keeping them separate?
Why is this important? Two reasons:
- If you are a company owner, it is in your personal best interest to ensure your company is properly structured and governed, or you are potentially risking your personal assets in the event of liability.
- If you are bringing a legal action against a company, it is in your best interest to understand whether the company’s corporate veil may be pierced or not.
With over 25 years of corporate formation, management and governance experience, Allison Legal has dealt with all such corporate governance matters, including mergers, acquisitions, liabilities, and piercing corporate veils.
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