Safeguard Your Corporate Veil
Incorporating your business is probably the best thing you can do to protect your personal assets. Why? Because the corporation is a separate legal entity, you as a shareholder usually cannot be held personally liable for the corporation’s debts and liabilities. This separation between a shareholder and the corporation is called the “corporate veil.”
What many don’t realize, however, is that there are steps you must take to ensure that your corporate veil holds up in court – that it doesn’t get “pierced.” Here are the most important things you need to do to safeguard your corporate veil:
- Always keep corporate and personal funds separate. Open a separate business bank account and make sure that only business expenses and income flow through this account.
- Don’t use business money to pay for personal expenses. If you don’t respect the difference between the corporation’s money and your personal money, the courts won’t either!
- Remember to follow the appropriate corporate formalities. This includes holding board of directors meetings, maintaining minutes of board and shareholder actions, having and observing the bylaws, etc.
- Be sure to properly capitalize the business. Inadequate capitalization is seen as a sign that the corporation is just the “alter ego” of the business owner.
- Don’t commit fraud or other criminal acts. Courts always disregard the corporate veil when the officers, shareholders, or directors of a corporation commit crimes.
- Be sure your corporate tax returns are accurate. Federal and state tax laws generally hold those individuals responsible for filing corporate sales and income tax returns personally liable for the accuracy of the information presented.
Bottom line: To avoid personal liability for debts and other acts of your corporation, you must run your corporation like the distinct and separate entity that it is.