The corporate veil

One of the biggest benefits of forming a corporation or a limited liability company (LLC) is the protection it provides to its owners. This protection is known as the corporate veil, a legal concept that separates the business entity from its owners, shielding their personal assets from the company’s debts, liabilities, or legal obligations. As long as the business is operated properly and within the law, the corporate veil ensures that shareholders or members aren’t personally responsible for business-related issues like lawsuits or unpaid debts.

However, this protection is not absolute. In certain circumstances, courts can choose to “pierce the corporate veil,” meaning they disregard the legal separation between the business and its owners. When this happens, the individuals behind the business, such as shareholders, members, or directors, can be held personally liable for the company’s actions or obligations. Piercing the veil is rare, but it typically occurs when a business has failed to follow required formalities, has commingled personal and business funds, has undercapitalized the company to avoid paying creditors, or has used the entity to commit fraud or injustice.

For example, if a business owner pays personal bills from a company bank account or never keeps proper records, a court may determine that the company is not being run as a separate legal entity. As a result, the owner’s personal assets could be at risk in a lawsuit or debt collection.

Maintaining the corporate veil is straightforward. Keeping accurate records, holding required meetings, maintaining separate finances, and operating transparently are all key steps. Whether you run a corporation or an LLC, taking the time to observe proper business formalities is one of the most important ways to protect yourself and your company in the long run.