What is protecting the corporate veil so important to any California business owner, member, shareholder or investor?  California LLC’s and Corporations are required to take regular actions and fulfill annual requirements to preserve and protect the “corporate veil” provided by the corporate business entity itself.  The primary reason to have an LLC or corporation in the first place is to create an entity which separates the owner(s) personal assets from the liabilities of the LLC or corporation.

You have a corporate entity to protect personal property such as your home and belongings, cars, boats and recreational vehicles as well as your personal checking, savings and investment accounts.  The corporate business entity is a “corporate veil” which legally separates and shields the owners of the corporation from personal liability for the company’s activities.

What Steps Can You Take to Protect the Corporate Veil?

Why is protecting the corporate veil so important and what steps can you take to protect the corporate veil.  This conversation usually begins with a lawsuit or some other contingent liability against a corporate entity.  The creditors, those who are owed money by the corporation or due to the corporation’s actions or conduct, may realize the business doesn’t have enough money or isn’t worth enough to settle the debt in question.  Naturally, they will want to pursue the personal assets of the company’s owner(s) in order to settle the debt or liability.

However, under California law (and according to the Supreme Court of the United States) a corporate entity is a separate “person” in the eyes of the law.  As long as the protections of the corporate veil are in place, the only recourse for any creditor of the company is the company’s own assets.  The creditor may not pursue the owners, as they are legally “separate” from the corporation under law.

In order for any creditor to get to your personal assets to settle a debt or judgment they must get through the protections of the corporate veil to get at you personally.  The first step a creditor will take in any dispute which involves a business or its owner is to challenge the validity of the corporate entity itself.  If you have not taken the appropriate actions, held regular meetings, avoided commingling of funds and assets and fulfilled all governance and compliance related regulations for the company, the opposing attorney will ask the court to “pierce the corporate veil” allowing them to pursue the owner(s) or member(s) personally for debts and liabilities arising out of the business activities of the business.

Pro-Tip: “You’re giving birth to a living creature that’s been recognized by the United States Supreme Court. And so what it means is birth is what we call capitalizing. And so you have these corporate documents and you have to decide on how much ownership will be and who owns what. Then you decide about what potential ownership there are. Reserve shares, I mean other ways in which people can own it. And then you capitalize it. Either you capitalize it with cash or you capitalize it with goodwill or a combination or a property. But how you capitalize it can determine whether or not it’s a real company or you have all those protections of corporate veil and creditors and you’re personally shielded. So how you start it is very important. And thinking about it, we’ll send you on the right path to avoiding all kinds of pitfalls and trouble.

The whole reason to have an entity is to separate you the person from the legal person of the business. I mean, especially if you’re going to be doing some big business, you’re going to have (potentially) big liability or you could personally not have big liability (if you maintain the protections of the corporate veil).” – Dan Watkins, Founding Partner

Why is protecting the corporate veil so important? Piercing the corporate veil strips away the legal and financial protections of the corporate entity to allow creditors to pursue the owners personally to satisfy debts and judgments against the company.  Protect yourself, and the corporate veil of your business. We invite you to review our podcast Episode 34 – Business Formation as well as the strong recommendations of our clients and contact the Watkins Firm or call 858-535-1511 for a complimentary consultation today.