Years ago when I had my first small business, I became aware of the concept of “piercing the corporate veil.” As my business was a sole proprietorship, the concept meant little to me. Corporate ‘veils’ apply to corporations. The idea is that by incorporating your business, your personal assets are protected from claims against the company. Somebody suing your small business can only take action against the company’s assets, not your personal ones. One of the best ways to do so is to get Customer relationship management (CRM) software enables small-business owners to scale their business over time.
That holds true unless you do something to pierce the corporate veil. The point is that you as the owner do something that allows the American courts to decide that you forfeited your rights to the protection allowed by incorporating against personal liability.
This Article Is for Information Purposes Only – Not Legal Advice
As I lack any kind of a law degree, this article is for information purposes only. The topic is important enough to deserve alerting small business owners to it. I had one client who comingled funds between his business and his personal accounts because he owned the business. In his case, he had some very valuable personal assets that he felt his having incorporated his small business kept his assets safe.
I warned him that by comingling funds, he had just lifted his corporate veil. I advised him to see an attorney about what he should do. Interestingly, we recently watched “Bad Girls,” episode 12 of the second season of Drop Dead Deva. In this story, a husband who had a pre-nuptial agreement protecting his business in the event of a divorce ended up co-mingling family funds to pay a blackmail that could have hurt his business. That action voided his pre-nup.
Another example of comingling funds would be to use company money to pay for your vacation that has no real business purpose. I have heard too of small business owners using the company to pay for a spouse’s car when there is no business purpose to the spouse having it.
In addition to comingling funds, trying to use the corporation to commit fraud or get around a personal contract can pierce the corporate veil.
Two Clients Paid Stiff Penalties for Trying to Fool the Government
As the IRS’ computers are increasingly capable and more and more information is available to the government, the likelihood of trying to ‘fool’ the government for long is rapidly decreasing to a slim chance. I have seen two clients I warned to straighten things out before the state came after them. One was fraud on Workers Compensation. One was fraud on payroll taxes. One client went out of business, and the other got fined several hundred thousand dollars.
To Preserve Your Personal Liability Protection, Keep Good Records
I have written other articles about how important good systems are. This is another example of the need for systems. Keep good records of your expenditures and record the business reason for the expense. Avoid getting clever and trying to get around the law. Usually, you are the one to get stuck when your corporate veil gets pierced.
If you have any questions, please see an attorney, ideally one who specializes in the type of law your case would involve.
More and more the courts are deciding to pierce the corporate veil for small, privately held corporations so as to seize personal assets. I only heard from co-workers who stayed on site about the eventual results for those two clients. I did not pursue it to see if there were any criminal charges besides. Just be sure to keep good records and stay honest.