What is the Corporate Veil?
Updated: Oct 6, 2021
There is a term in the legal industry called the “Corporate Veil.” While it sounds mysterious, the true definition is relatively simple and relates to the legal protections of the owner of a corporation or LLC.
Our experienced business attorney breaks down exactly what the corporate veil is and how it works.
What is the Corporate Veil?
The corporate veil protects business owners from personal liability should there be a lawsuit or other dispute involving the company. When you form an LLC or establish a corporation, you're creating a legal entity separate from yourself as the owner.
Due to the business being a legal entity separate from you as a person, the business has the rights to sign on to contracts, take out funding, and participate in legal matters.
The actions of the business should not affect you personally, since you are both separate legal entities. This is what we mean by the "corporate veil". However, there are a few things you need to do to maintain this protection, or you risk being held personally responsible for the actions of your business.
Example of How the Corporate Veil Works
For example, let’s say that your corporation has $50,000 worth of equipment and another $50,000 in the bank. All told, your assets total $100k.
Along comes a disgruntled employee who sues the company for $500,000, and they win. If the business owner has been keeping up with the legal formalities associated with operating a corporation, then his personal assets will often be protected.
On the other hand, if the owner hasn’t been following the state’s requirements for a corporation, then it’s possible that this disgruntled employee could walk away with not only the business’ assets but those of the owner as well. Yes, this may even include the owner’s personal funds, retirement accounts, house, cars, etc. depending on the circumstance.
What is Piercing the Corporate Veil?
One of the great things about forming a corporation or an LLC is having the ability for your business to operate under the protection of the “corporate veil”. However, merely filing Articles of Incorporation online will most likely not be enough to prevent that extremely important veil from being pierced when trouble is lurking.
In order to maintain the protection of the corporate veil, business owners have to continuously protect it. If it isn't protected, the corporate veil can be pierced. In basic terms, you need to have a proven track record of keeping business and personal matters separate and treating your business as its own distinct legal entity.
There are many different situations that an attorney will use to argue that the corporate veil was pierced — here are a few examples to give you an idea of how it works.
Common ways the corporate veil can be pierced:
Combining personal and business bank accounts
Using business expenses for personal matters
Failing to maintain legal requirements of operating a corporation or LLC
Not distinguishing business assets from personal assets
Lack of necessary legal documents, such as an operating agreement
In the example we mentioned above, the corporate veil could be pierced if the business owner didn't keep up with their state's requirements for operating a corporation. This could include not conducting shareholder meetings, failing to take minutes of each meeting, or not putting together company bylaws.
When Will Courts Pierce the Corporate Veil?
As mentioned above, there are specific actions that may signify if your corporate veil was properly maintained. However, at the end of the day, whether or not the corporate veil was pierced is up to the court and attorneys.
Piercing the corporate veil means that the court will hold business owners personally responsible for certain actions. This usually happens when there's no distinction between the company and business owners or the company was engaged in fraudulent activity.
Who is Protected by the Corporate Veil?
The corporate veil protects the business owners of the corporation or LLC from being held personally liable for lawsuits or debt owed on the business's behalf. As long as the corporate veil has not been pierced, the business owner's personal assets should remain protected.
How Do I Get A Corporate Veil?
Obtaining a corporate veil first requires you to be operating a corporation or LLC. Then, it's up to you, as the business owner, to maintain the veil.
If you need help registering your business or protecting your corporate veil, contact us or give us a call at 727-477-2255.