How to Prevent a Creditor from Piercing the Corporate Veil in San Diego

How to Prevent a Creditor from Piercing the Corporate Veil

Many San Diego small business owners inadvertently blur the line between their business accounts and their personal accounts.   In many cases it may be a matter of practical need, but the long term consequences can be severe.  What do you need to know about the protections of an LLC or corporate entity and how to prevent a creditor from piercing the corporate veil?

The entire reason to have a business entity for most is to separate personal liability from business liability.  The LLC, S-Corporation or C-Corporation becomes its own legal entity including the right to own property, enter into debt and transact goods and services.  When the company enters into debt (assuming the lender or creditor doesn’t ask for a personal guarantee) the creditor’s primary source of recovery is the assets of the business itself.  This protects the personal assets of the business owners such as their home, personal bank accounts and investments.  If the business creates some form of legal liability the only legal recourse (in theory) is the business itself.  This is known as the “corporate veil.”

Generally speaking, the owner(s) of a company or shareholders of a corporation are not personally liable for the company’s debts.  There are cases where San Diego courts have allowed a plaintiff to go after the personal assets of directors, officers or shareholders of the corporation to satisfy a judgment against the business or to relieve the debts and other liabilities of the company itself.  In order to do so the creditor must “pierce the corporate veil” and demonstrate that the company, LLC or corporation is in fact the “alter ego” of the owners, an not in fact a separate legal entity.  The process of how to prevent a creditor from piercing the corporate veil are therefore quite clear: maintain the “corporate formalities” and compliance necessary to demonstrate the entity is separate and make sure the assets and funds of the business are never used for personal reasons.  Likewise, personal funds and assets must never be used for business purposes.

Commingling of funds and assets is a primary way for any creditor to allege the LLC or corporation is not separate from the individual(s).  The experienced business attorneys at the Watkins Firm advise our clients on how to prevent a creditor from piercing the corporate veil and preserving the protections of a business or corporate entity.  Are you concerned that corporate formalities such as annual meetings, minutes and procedures are not being followed?  Are you concerned about the commingling of assets?  We invite you to review the strong recommendations of our clients and contact the Watkins Firm or call 858-535-1511 for a complimentary consultation today.

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