How to Avoid Piercing the Corporate Veil and Maintain Personal Asset Protection for Your LLC

Piercing the corporate veil is a legal jargon that pertains to the loss of personal asset protection of owners and shareholders of either a corporation or an LLC (limited liability company). It normally occurs when a creditor has filed a lawsuit against a company for fraudulent or negligent business practices that ultimately resulted in financial damages or unpaid debts to a creditor. If the creditor wins its lawsuit, a court judgment is ruled against the company allowing the creditor to seize the assets held by the company. However, if the company does not have enough assets to satisfy the judgment, the creditor can then proceed to go after the company owner’s personal assets by using a legal process known as piercing the corporate veil. Once this occurs, the owner is at risk of losing personal items that dictates his particular daily lifestyle. These items can include his stocks, bonds, bank savings, valuable family heirlooms, or even his home. In order to avoid piercing the corporate veil of your LLC, you will need to follow certain legal guidelines. Even if a judgment is filed against your LLC, the court will not be able to pierce the corporate veil as long as you comply with these guidelines.

As an LLC owner, you must observe corporate formalities. These formalities include constructing and consistently updating an operating agreement, distributing membership certificates, keeping a membership transfer ledger, and holding annual meetings of both members and managers. Fortunately, you will not have as many corporate formalities as S-Corp or C-Corp business entities. However, you will still be required by law to follow those that pertain to your LLC through both state and federal regulation. Failure to do so will be grounds for piercing the corporate veil.

Document all of the business undertakings of your LLC. Keep a record of all business transactions, spending, and investing processes. Also, keep track of major business meetings and final decisions. Keep good records of all company contracts, signed deals, arrangements, covenants, and all other formal written agreements. Keep all of your formal business documents safe and well-organized for at least seven years.

Make sure to arrange and conduct formal meetings with all of the members and managers of your LLC. Keep the meeting minutes from each of these meetings. The minutes should consist of discussions pertaining to corporate issues, daily business dealings, declaration of dividends, mergers approvals, issuance of shares, sale of assets, fund deposits, financial statement, and audit reports. You should also document the duties and conduct of the members and mangers as they took place during the meetings. As a note, if done properly, you are permitted to maintain minutes through a written record of the meetings, or the directors and shareholders can unanimously take the minutes without a meeting. Either way you will still be in compliance with your states corporate regulations.

As much as this is a simple and straightforward concept, there are still thousands if not hundreds of thousands of LLC owners who engage in fraudulent business practices. Fraud is usually intentional with no regard for either the law or the public at large. Although, this is a no-brainer and should not even be a topic of discussion for the civil-minded, the issue of fraud still needs mentioning. In a word, don’t commit fraud. It’s an egregious act that not only causes financial and emotional damage, but can ruin innocent lives as well. So please, avoid it at all cost as you would a rattlesnake.

As a business owner of any kind, you must avoid commingling business and personal assets. Commingling is done by either depositing business funds into your personal bank account, or the reverse. Doing either is a serious matter, and will get you into lots of legal trouble. Needless to say, your LLC will very likely get pierced by a judge. Keep business and personal assets separate. Any funds that are to be used for business should only be withdrawn from the business. Likewise, any personal business should be conducted through your personal bank accounts. Open a separate business checking account. Obtain business credit cards to free up some of your corporate money. Keep track of all of your business transactions such as expenditures, deposits, and investments. In a nutshell, maintain all business and personal assets separately.

You always want your business to be familiar and easily identifiable to the public so that it reaches its target and ultimately makes money. Also, you need to demonstrate that your business is in good standing, and is freely operating under the law. Therefore, make certain to market your LLC through word-of-mouth, local newspaper, or online advertising. Design and create business cards displaying your business name, your legal name, business address, and logo. Create letterhead bearing your business location and contact information (and create business envelopes as well). Generate invoices in the name of your LLC to send to your clients. Make  sure to keep records of profits and losses, and file your corporate taxes by March 15 of every tax year.

Your business must have capital in order to survive. Without it, your business will suffer a great deal. Worse, if it is sued, is unable to satisfy a court-order judgment, and is then found to be undercapitalized or zero capitalized; it can end up with its corporate veil pierced. Therefore, you must make absolutely sure that your LLC is adequately capitalized. There are a number of way to capitalize your LLC. You can do so by investing your own money, using private funds from family members, starting a joint venture relationship, or securing a business loan. There are no percentage or average capitalization requirements, but you should always keep you business in the black with adequate capitalization. Doing so will keep you out of corporate and legal hot water.

These are some basic steps that you must follow in order to avoid piercing the corporate veil and maintain personal asset protection for your LLC. If you comply with all of these and other requirements pertaining to your state, you will be in good corporate shape, and will operate your business without any type of  unwanted legal downfall.