How To Establish a Corporate Veil

How To Establish a Corporate Veil

The last thing a business owner wants is to wind up being personally sued in a lawsuit for problems that arise in the business. To protect yourself from personal liability, it is essential to set up a corporate veil. The corporate veil is the legal term used to describe the separation between the assets of a legal entity and the personal assets of shareholders, directors, and officers. The corporate veil provides liability protection for business owners by protecting their personal property from being used to satisfy judgments or business liabilities. 

However, some ways of setting up a corporate veil provide more protection than others, and the corporate structure you choose, the creation of your operating agreement, and the up-front capitalization will play a role in determining whether your entity’s corporate veil can withstand potential future lawsuits.

To avoid problems, it is important to set up your corporate veil correctly when you are forming your business, to utilize correct practices when operating your business and deal with problems correctly when they arise.  An experienced Missouri business attorney can help you understand the corporate veil and how it works, as well as create one that is difficult to pierce and works best for you.

How to Establish a Corporate Veil

If you do not formally create a separate legal entity for your business, it means you operate as a sole proprietor or a partnership and have no protection for company liability and debts. To get legal protection in Missouri, entrepreneurs and business owners may structure their enterprise as an LLC or corporation. 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 Some Business Entities Offer More Protections for Owners Than Others

The level of personal protection you will have as a business owner depends on the type of business entity you set up. Your choice of business structure can impact personal liability and affect your taxation and how your business will be managed and controlled.  The following is an overview of some common business entities and the protections they offer:

Sole Proprietorship and Partnerships: These have no protection from business liability; owners are personally liable for all business debts and lawsuits, including employee negligence. Partners share equal responsibility and liability.

Limited Partnership (LP): A limited partnership has one general partner who operates the business and who has unlimited personal liability for company debts and obligations. The other partners have limited liability in exchange for limited control, and their liability is generally limited to the amount they have invested in the partnership. 

Limited Liability Partnership (LLP): All partners have limited liability and are not personally liable for the LLP’s debts and liabilities. They are liable for company debts, their actions, and the actions of those they directly supervise, but they are not liable or responsible for the actions of other partners. 

Limited Liability Company (LLC): Members (owners) of an LLC have limited liability, similar to shareholders of a corporation, and their personal assets are generally protected from business debts and lawsuits. However, LLC members do not have complete protection from personal liability. They are liable for any debts they personally guarantee and could also be liable for unpaid payroll taxes, fraud cases, and if they are sued for personal wrongdoing.

Corporation (C-Corporation or S-Corporation): Corporations, similar to LLCs, provide the highest level of protection from personal liability. A corporation is a legal entity separate and apart from the shareholders (owners), who are not held liable for any corporate debts or liabilities. However, owners could be held liable if they personally guarantee a loan for the business or personally sign a contract. A shareholder could also be liable for unpaid payroll taxes, fraud cases, and if they are sued for personal wrongdoing.

Professional Corporation (PC) or Professional LLC (PLLC): Designed for licensed professionals (doctors, lawyers, accountants, etc.), these offer liability protection.

A consultation with an experienced Missouri business lawyer can help you determine the level of personal liability protection you need need, along with other factors such as taxation, management structure, and operational flexibility. 

Piercing the Corporate Veil

Even when business owners establish a corporate veil, there are instances in which the court may “pierce the veil” and set aside the liability protection that was established by creating a legal entity. When the corporate veil is pierced, the business owners, directors, officers, members, and shareholders could have personal liability for a debt and face a challenging legal battle.

“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 pierced, owners no longer enjoy the legal and financial protections that the veil created, and owners’ or members’ liability is greatly expanded.  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.  

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.

Inside Piercing

“Inside piercing” of the corporate veil occurs when a minority owner of an LLC intentionally pierces their own entity’s veil to seek recovery for liability of the LLC.  Courts allow, under appropriate circumstances, a minority LLC member to sue the LLC responsible for a loss or personal injury to the minority member through fraud or wrong.  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).

How to Prevent Having a Corporate Veil Pierced 

The best way to keep a corporate veil from being pierced 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 or corporation:

Start with Adequate Capital

An LLC or corporation must be adequately capitalized at the outset so as not to create the likelihood that the business will fail. If an LLC or corporation is under-capitalized from the start, a third-party plaintiff can use this as an argument to pierce the corporate veil.

Keep Minutes of Meetings; Document Decision-Making

Whenever there are meetings of the corporate shareholders or LLC members, be sure to type up the minutes of the meeting and save them, and make sure members sign any resolutions made. Also, be sure to file any annual report or other tax paperwork required by the state. Called “corporate formalities,” these formalities are essential in maintaining the separate structure of the corporation.  These formalities are less frequently present with an LLC.

Establish Separate Business Bank Accounts and Credit Cards

Commingling funds is a no-no when it comes to maintaining an LLC or corporation.  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 or Corporation Has Employees

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

Personal Signature Versus Signing on Behalf of the Corporation or 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 or corporate shareholder, not as a private citizen. For example, the signature block could say “Beth Jones, Authorized Member of Bright Morning Bakery, LLC.” 

Get Help from a Skilled Business Law Attorney

Attorney Kelvin Birk has helped many entrepreneurs and owners manage legal issues related to launching and maintaining a business and setting up a corporate veil.  He is both a lawyer and a Certified Public Accountant, which means he understands the law, accounting, and a myriad of financial issues.  Mr. Birk is also a small-business owner himself, so he understands firsthand the interests and concerns of entrepreneurs and executives.

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 and how we can help you, contact us for a free consultation.

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

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 ]