This is Part I of two on maintaining the “corporate veil”.
The “corporate veil” is the phrase we lawyers use to note that business debts and liabilities belong to the business and not the individual owners. This rule is fundamental to business law. Courts and legislatures give businesses their own identity, apart from the owners. This means that the business, not the owners, can be held liable for the debts of the business.
By maintaining the corporate veil, you can protect yourself from individual liability for the businesses debts.
Businesses are treated as a separate individual, just like all people are treated differently. This includes a birth date (registration date), a social security number (EIN), its own identity and even a nickname (business name, “dba”); its own address; its own rules for how it conducts itself day to day (bylaws); its own bank accounts; and the ability to enter into contracts in its own name and sue and be sued.
But when the individual owners treat the entity merely as a part of themselves by mixing up their personal self with the business self, those business liabilities may fall on the individual owners.
How to Maintain the Corporate Veil
So we have what’s called the “corporate veil”, and holding the individual owners liable is called “piercing the corporate veil.” How do you protect yourself from your business debts? I’ll tell you.
The overall idea is that a business has a separate existence from the owners. Thus, treat it like it is a separate individual. Imagine you’re building a wall between yourself and the business. Each of the items I discuss here are one brick you use for building that wall. If a court finds that you’ve build the wall high enough, it will shield you from the entity’s liabilities. Not enough bricks, and you might find yourself on the losing end of a lawsuit.
Hendersonville and WNC
Keep the Businesses Existence Legally Registered and Separate
The business is registered with your state’s authority. This is usually the Secretary of State or a department set up to accept business registrations. Do this. And then keep your annual renewals up to date. This tells the world – and the people with whom your business deals with – that the business is not you. A business for which the annual renewals have lapsed is treated as the sum of the owners (a “de facto partnership” we call this) and the shield is generally ignored.
Keep Separate Accounts for Everything
Separate bank accounts for sure, there’s no getting past that one. If you run your business funds directly into your personal bank account, that’s a huge brick missing in the wall you’re building.
Separate social media accounts. Separate vendor accounts. Separate credit cards. I know a lot of people run their business from their cell phones these days. Do your best. Get a business-only phone number added to your cell plan if you can. If not that, register for a new phone number.
Get Insurance in the Business Name
This is another big brick to use when building the wall and maintaining the corporate veil. Get insurance in the name of the business. Because the whole point of creating this wall is to protect yourself from liability, there is no better indicator that you are consciously doing this than literally getting liability protection from an insurer for the business.
Conclusion to Protecting the Corporate Veil
These tips, and the tips from Part II, are not guaranteed. A judge is going to do whatever he does. But by establishing procedures to ensure that all corporate formalities are followed, you will stand a good chance of keeping the businesses liabilities within the business.
If you need help setting up or reviewing your business operations to make sure you have the “corporate veil” in place, call me in North Carolina at (312) 671-6453 or email me at palermo@palermolaw.com.
Here’s some other blog posts you might like:
Check out some of my podcasts on business law: