How "Piercing the Corporate Veil" Pierces Your Pocketbook

Posted on March 11, 2018 in Form a Company

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Have you ever felt “forced” to do something you really don’t want to do? Attending a family function for your in-laws, contributing to a particular charity you don’t care about for a colleague, sitting through Wagner’s Ring Cycle (or a WWE wrestling match) for your significant other–all come to mind. Now imagine if you had to do this monthly. Chances are, you wouldn’t keep it up. You’d find excuses not to go, muster less and less enthusiasm for it and, eventually, find a way to put it out of your mind altogether.

Observing the “formalities” of running a corporation (and, to a lesser extent, a limited liability company) can engender similar feelings in a number of business owners. I’ve met entrepreneurs who were dragged to me kicking and screaming by their accountants (or spouses) to form a corporation. They didn’t want to do it, didn’t want to spend the money, and they  certainly didn’t want to be responsible for holding board meetings, taking minutes, or documenting major decisions made on behalf of the company. So they didn’t.

But in failing to do so, they put themselves and their personal assets at risk. In “Piercing the Corporate Veil and How to Avoid It,” Teri Rasmussen ably points out the dangers of getting lackadaisical with the “niceties” of running a corporation. Although her focus is on Ohio cases, the basic principles apply. Owning and running a corporation is a privilege. The corporate law requirements are not optional. And they should not be dismissed by saying, “They’re not a big deal.” If you don’t handle these matters properly, your business creditors could make a case for coming after your personal assets.

What are some of the vulnerable spots for entrepreneurs, especially in companies with multiple owners?

  • When the president (who is not the only officer of the company) makes all the decisions, including how money will be spent.
  • Inability to name the members of the board.
  • No corporate records.
  • Substantial payments being made to family members (for “loans” or “services rendered”) without documentation to support a business reason for them.
  • Failure to file corporate tax returns.
  • Paying salaries to the owners while the financial records of the company are inaccurate and in arrears.

It’s easy to lose track of these issues and to see them as yet another burden of business ownership. So delegate it. A competent business attorney can help prepare this documentation for you (plus, prod you as to when you should do so).

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