How To Establish a Corporate Veil

How To Establish a Corporate Veil
  • February 14, 2022
  • Kelvin Birk
  • Business

If you’re wondering how to establish a corporate veil, this blog seeks to answer that question. The way you establish your business from the outset – including the corporate structure you choose, the creation of your operating agreement, and the up-front capitalization – will determine, in part, whether your entity’s corporate veil can withstand potential future lawsuits.

You want to make sure that corporate owners and LLC members have all the protections available to them under the law. A corporate veil can shield owners’ and members’ personal assets, placing them beyond the reach of a business’s creditors.

What Is a Corporate Veil?

Our skilled business attorney explains how to set up a corporate veil.

One of the main reasons entrepreneurs and business owners structure their enterprise as an LLC or corporation is that these corporate structures provide owners with a measure of legal protection against creditors and lawsuits. Generally, owners, members and shareholders of an LLC or corporation cannot be held personally liable for a business’s debts. This means that owners’ personal assets – like homes, real estate, financial portfolios, and other possessions – cannot be reached by creditors when creditors sue a business.

The Limitation of Liability of a Member or Manager are laid out in statute at RSMo. § 347.057 (2019).  It reads:

A person who is a member, manager, or both, of a limited liability company is not liable, solely by reason of being a member or manager, or both, under a judgment, decree or order of a court, or any other manner, for a debt, obligation or liability of the limited liability company, whether arising in contract, tort or otherwise or for the acts or omissions of any other member, manager, agent or employee of the limited liability company.

However, a corporate veil is not absolute. The corporate veil can be “pierced” for a variety of reasons. When this happens, owners and members of an LLC can be held personally liable for business debts, putting the owner’s personal finances at risk.

How To Maintain a Corporate Veil

The best way to maintain a corporate veil is to make sure your LLC or corporation is set up properly in the first place.  A skilled business attorney can help you do this.  You must file the correct documentation in Missouri to establish and maintain your business, adequately capitalize your business at the outset, keep business and personal assets separated, and maintain solid and consistent recordkeeping.

Keep the following things in mind when establishing and carrying out business within an LLC:

Start with Adequate Capital

Launching a business on a shoestring can sound romantic, but it can also leave an LLC open to lawsuits from creditors. Courts have been very clear that an LLC must be adequately capitalized at the outset so as not to create the likelihood that the business will fail. If an LLC is under-capitalized from the start, a third-party plaintiff can use this as an argument to pierce the corporate veil.

Keep Meeting Minutes and Document Decision-Making

Whenever there are meetings of the LLC members, be sure to type up the minutes of the meeting and save them. Also, make sure members sign any resolutions that reflect decisions made. Called “corporate formalities,” these are ways of formalizing and documenting decision-making at an LLC. Also, be sure to file any annual report or other tax paperwork required by the state. All of these formalities may feel time consuming, but they’re essential in maintaining the separate structure of the LLC.

Establish Separate Business Bank Accounts and Credit Cards

Commingling funds is a no-no when it comes to maintaining an LLC.  The easiest way to make sure members’ personal funds are kept separate from business funds is to establish a separate checking account and credit cards for the business.  Never use business credit cards to purchase personal items, even in a pinch.  This is just one way to ensure the separation of assets.

Pay Appropriate Withholding Taxes If Your LLC Has Employees

If you have employees, it’s important that all employment laws are followed closely, including the LLC paying withholding taxes in a prompt and appropriate manner.

Personal Signature Versus Signing on Behalf of the LLC

Whenever signing business paperwork – whether it be checks, resolutions, loans, or other documents – make sure the signature block represents the fact that you’re signing as an LLC member, not as a private citizen. For example, the signature block could say “Beth Jones, Authorized Member of Bright Morning Bakery, LLC.”

Attorney Kelvin Birk has helped many entrepreneurs and owners manage legal issues related to launching and maintaining a business.  He is both a lawyer and a certified public accountant, which means he understands the law, accounting, and a myriad of financial issues.  He brings both a keen legal mind and decades of financial experience to the table when he works with clients.  Mr. Birk is also a small business owner himself, so he understands firsthand the interests and concerns of entrepreneurs and executives.

Piercing the Corporate Veil

When are an LLC or corporation’s owners, shareholders, or members personally liable for corporate debt?

“Piercing the corporate veil” happens when a court rules that the activities of the owner(s) fail to maintain the separation between themselves and the business entity.  When the veil is pieced, owners no longer enjoy the legal and financial protections that the veil created.  This means that third-party plaintiffs can potentially reach the personal assets of the owners if plaintiffs file a successful lawsuit against the business to collect a debt.  When the veil is pierced, owners’ or members’ liability is greatly expanded.

Following are examples of the types of things that can pierce a corporate veil:

  • Failing to file the required documentation for creation and maintenance of your business entity in Missouri
  • Commingling assets – failing to keep business and personal funds separate
  • Conducting fraudulent business dealings
  • Personally guaranteeing a business loan
  • Using a business credit card for personal purchases
  • Failing to keep required business records and meeting notes
  • Placing personal property (such as home, real estate, financial portfolio, etc.) as collateral for a business loan.

There’s a lot to know about how corporate veils can be pierced, so speak to a qualified and skilled business attorney in Missouri to learn more.

“Inside Piercing”

“Inside piercing” of the corporate veil has been upheld by Missouri courts.  Inside piercing is when a minority owner of an LLC intentionally pierces their own entity’s veil to seek recovery for liability of the LLC.  In other words, courts allow, under appropriate circumstances, a minority LLC member to sue the LLC responsible for a loss or injury to the minority member.  In this way, the minority member can access the individual assets of fellow LLC members. This legal concept is articulated by the Missouri Court of Appeals in Hibbs v. Berger 430 S.W.3d 296, 304 (Mo. App. E.D. 2014).

According to Hibbs, the corporate veil can be pierced If the claimant can show:

“(1) Control, not mere majority or complete stock control, but complete domination, not only of finances, but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own; (2) Such control must have been used by the defendant to commit fraud or wrong, to perpetrate the violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiff’s legal rights; and (3) The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.”

Establishing an LLC and Other Business Matters

You can read more about establishing an LLC, dissolving a business, and other legal matters by reading the following Birk Law Firm blogs:

Choosing the Best Business Law Attorney

Attorney Kelvin Birk can answer questions such as “How does a corporate veil work?” and many other business inquiries.

If you are an entrepreneur and want to launch an LLC, it’s critical that you file the appropriate corporate formation documents with the state and adequately capitalize your business at the outset. Significant under-capitalization could leave you vulnerable to lawsuits from business creditors. When it comes to warding off lawsuits, an ounce of prevention is worth a pound of cure. Attorney Kelvin Birk can help with all of the following business law needs:

  • Corporate formation
  • Contract drafting and review (employment, sales, purchase, insurance, franchise, and lease agreements)
  • Purchase/sale of a business
  • Succession planning
  • Business litigation
  • Construction law
  • Dispute negotiation and settlement.

Mr. Birk has spent decades providing legal services to business owners and executives, and he also has deep knowledge of accounting and financial regulations.  He is proud of the outstanding client testimonials he receives from satisfied clients.  To learn more about the legal services we provide, contact us for a free consultation at 573-332-8585.

Attorney Kelvin Birk

Attorney Kelvin Birk

Kelvin Birk is a lawyer as well as a certified public accountant, with more than 30 years of experience in accounting and tax and business consulting, and more than 20 years of experience in numerous legal matters. This combined expertise allows our law firm to provide a level of service above that of other firms. Whatever your legal situation, your attorney at Birk Law Firm can counsel you as to the tax implications. We have experience in providing myriad legal representation services to residents of southeast Missouri and other areas.. [ Attorney Bio ]