Are you concerned about the corporate veil?  Are the actions of a business partner, such as commingling business and personal funds, or the inaction to maintain corporate governance weighing heavily on you?  The ability of a creditor to pierce the corporate veil is always a primary corporate concern.  Why should any business concern, corporate officer or shareholder be concerned about protecting the corporate veil?  Why is the piercing your corporate entity the primary strategy used by creditors to get past the protections of an LLC, S-Corporation or C-Corporation in California?

What Does it Mean to Pierce the Corporate Veil?

Many business owners in San Diego and throughout California have never heard the term “piercing the corporate veil.”  So, let’s begin with a simple question:

Why do you have and need a business entity in the first place?

Why do you need to select a business entity and go through the expense and hassle of starting a company and maintaining your company’s integrity anyway?  The answer is equally as simple:

In California, the business entity separates you, the individual, from the liabilities associated with the operation of your company.

Forming an LLC or corporation is about the creation of a legal protection for your personal assets and accounts.  A corporate entity creates a type of legal shield which separates you as an individual (and your spouse, if any) from the reach of creditor who has a claim for liability against your company.  If the company doesn’t have enough capital to settle a debt a creditor’s primary goal is to find a way to hold you personally responsible or liable for the debt.  The fastest way to accomplish this is to pierce the corporate veil – the shield which is a business entity so that the creditor can pursue your personal assets to settle a debt.

This is why you should always be concerned about the corporate veil.  The integrity of your company and protections of the corporate veil must be protected at all times, especially if you own your own home and have your own bank accounts and investments or other business interests.

Creditors and adversaries in litigation and lawsuits want access to every asset you have in order to satisfy any debt or judgment against your business including forcing the sale of your home and liquidating all of your personal accounts and retirement assets.

The “corporate veil” of any business entity such as an LLC or corporation separates you, the individual, from your business entity.  The actions of any member in an LLC or shareholder in a corporation can expose the other owners and even investors to substantial liability.  Creditors will try to show that you weren’t actually a business, but that an officer of the corporation (or many officers) commingled assets and funds between their business and personal life.  They will attempt to use this and the lack of company minutes and up-to-date corporate documents to convince a Court to “pierce the corporate veil” in any litigation to be able to gain access to your personal assets.

Pro-Tip: “The corporate veil applies to both limited liability companies and corporations and also some other trusts and things like that. But if you have a separate business entity, you have something called a “corporate veil.” The Supreme Court describes a corporation as a “separate legal entity,” unique, an individual.

And the thinking is if you keep everything separate and you treat it as a separate entity, you don’t co-mingle funds. You don’t fail to keep records. Then if there’s an obligation of the corporation or if there’s no statute saying it goes right to the primary owner, owners, and shareholders, then you are not personally liable for that. And that means you can take more risks in the business place. You can take out loans, you can get vendor contracts, you can get employment contracts, you can do all kinds of things, joint ventures, mergers, all kinds of things in the name of the business. And when you get home, if things go bad, you don’t have to tell your spouse, ‘yeah, I lost the house.’

Corporate governance is maintaining your corporation in a legal and proper fashion, such that you’re in compliance with all the laws of the state of California, so that you may be respected in your corporate form as a separate legal entity. It’s about fairness, it’s about fraud, it’s about doing business in a proper manner, which doesn’t rip off customers, doesn’t damage vendors or lenders. If you maintain your corporation in a proper fashion, keep your minutes, keep your statement of information with the Secretary of State filed, have your meetings and maintain proper records and do business separately, then you should have benefits. You should have tax benefits, you should have investor benefits. You should have benefits when you want to sell your company. And someone comes to look at your corporate entity, like when we sell a company, we have to come up with something called schedules. Schedules are what we use to identify all the different elements to tell a buyer this is a proper corporation and it’s a safe bet to purchase or to merge with.

So all those things. And on top of that, if you comply with corporate governance, you’ll end up doing better in business over the last 40years. The ones I see that don’t hold their meetings, that don’t keep records, that don’t refuse to commingle, those ones don’t do as well. The ones that really stay on it and run their business the right way are usually much more successful.” – Dan Watkins, Founding Partner

Owners of the Business Should Always Be Concerned about the Corporate Veil

If you own any sort of interest in an LLC, corporation or other business entity you should be concerned about the corporate veil and maintaining the types of internal controls required to protect your company.  The protection of the corporate veil is the fiduciary duty of every business owner, corporate officer, executive or investor.  The Watkins Firm brings more than 40 years of experience helping clients to maintain corporate governance and protect the corporate veil.  We can help to address these issues, put a stop to commingling or other potentially harmful practices and help you to do everything possible to protect your business entity.  Learn more about how the Watkins Firm can help and the role of corporate governance in this process.

We invite you to review our podcast Episode 24 – Corporate Governance as well as the strong recommendations of our clients and contact the Watkins Firm or call 858-535-1511 for a complimentary consultation today.