Not Such a “Veiled” Threat

One type of veil is an article of clothing some women wear out of modesty to protect against unwanted attention.  Another is a religious cloth used to protect an item of particular religious significance.  The word veil also can be used to describe the divide between the bodily or corporate and the spiritual worlds – a sheath, of sorts, which separates the known from the unknown.

Corporations and limited liability companies can also be thought of as wearing a “veil.” The corporate veil protects what is underneath – the shareholders, manager, and members – from undesired personal liability for company obligations.  The corporate veil also separates what may be unknown owners from obligations that the known corporate or limited liability company has assumed.

At a wedding, a bride’s veil may be lifted to reveal the bride’s face.  In a church, a chalice veil may be lifted to give access to sacramental wine.  Some people believe that spirits can pass through the veil between the bodily and spiritual worlds.  Likewise, a company’s creditors may be able to lift, pass through or “pierce” the corporate veil to impose liability on the company’s owners.

Typically, this occurs where business owners have failed to observe the separateness of the company from the owners. This can easily can occur with single member limited liability companies set up as special purpose entities.  Other times, the corporate veil may be pierced where the company’s owners have removed assets from the company or have committed fraud or other wrongful acts.

A business can minimize the likelihood of someone piercing the corporate veil through careful business operations, including the following:

  1. Start out with adequate capitalization so that the business can support its needs. If additional capital is needed, obtain it through well-documented loans or formal capital contributions from the owners.
  1. Hold the business out to others as a separate company, with separate letterhead, business cards, contracts, and leases.
  1. Assure that the business’ assets are not co-mingled with those of the owners or any other business. Open a separate bank account for the business and make sure that business revenues and expenses are deposited into and paid from that bank account.
  1. Work with the company’s attorney to assure not only that appropriate by-laws or operating agreements are in place, but that appropriate corporate governance, such as minute books, stock ledgers, board meetings, corporate resolutions, and other business formalities, are observed on an ongoing basis.
  1. Do not make distributions to owners if that would result in the business being unable to pay its obligations.
  1. If an affiliate’s employees are expected to perform services for the business, have the business’ attorney prepare written contract that describes the services and the amount to be paid for them. Make sure the contract is honored.

Corporations and limited liability companies are formed because their owners wish to limit their liability for business obligations. However, forming the business is just the beginning.   Retaining that limited liability requires the guidance of a business attorney, good legal documentation, and careful business operations.

Elizabeth Whitman

Disclaimer: The content of this blog is intended for informational purposes only. It is not intended to solicit business or to provide legal advice. Laws differ by state and jurisdiction. The information on this blog may not apply to every reader. You should not take any legal action based upon the information contained on this blog without first seeking professional counsel. Your use of the blog does not create an attorney-client relationship between you and Mirsky Law Group, LLC.