Piercing of the Corporate Veil
Once piercing of the corporate veil occurs the liabilities of the business become the liabilities of its owners.
The legal theory used to accomplish this is known as the “alter ego” theory. Under this theory it must be proven that the owner did not operate his entity as if it were a separate legal entity. Activities such as commingling of funds are one of the leading factors that lead to corporate veil piercing.
To protect yourself and maintain the integrity of the corporate veil you should know what types of practices can put you at risk. By having the right knowledge you can create a stronger corporate veil and avoid putting your personal assets in danger.
Review the following list of 10 commingling activities to avoid so you can prevent alter ego now and in the future:
- Depositing company funds into a personal account rather than the business account.
- Paying personal bills with corporate funds.
- Using personal bank accounts for business.
- Paying business expenses with personal funds.
- Depositing corporate funds to and from another company’s bank account.
- Withdrawing corporate funds to and from another company’s bank account.
- Moving assets between businesses in order to generate or access funds.
- Moving assets between the business and its owner(s) in order to generate or access funds.
- Mixing bank accounts between businesses.
- Issuing company loans to shareholders, directors or officers without proper documentation.
As long as you respect this separateness, your business entity will have no issues being recognized as a separate legal entity and will be ultimately responsible for its own debts.
However, there are many other commingling activities related to loans that can also risk piercing of the corporate veil. The bottom line is if your business loans money to another company or to a director, officer or shareholder of the corporation make sure it’s done properly.
Complete the required loan documents and ensure that the borrower complies with the terms of the loan. Your company is also responsible to comply because failure to do so can open your company up to commingling of funds. Don’t commingle business assets with personal assets. And don’t commingle your company’s assets with another company that you own.
On a final note, proper record-keeping is also critical to protecting your limited liability even when you establish business credit in the name of your business.
Don’t leave yourself open to a possible alter ego theory because you don’t want to have unlimited, personal liability for all the debts of your business.
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About the author
Marco Carbajo is a business credit expert, author, speaker, and founder of the Business Credit Insiders Circle. He is a business credit blogger for AllBusiness, a subsidiary of Dun and Bradstreet and author of “Eight Steps to Ultimate Business Credit” and “How to Build Business Credit with No Personal Guarantee.” His articles and blogs have also been featured in American Express Small Business, Business Week, The Washington Post, The San Francisco Tribune, Scotsman Guide, Alltop, Entrepreneur Connect, and Active Rain.