Protect Your Assets from a Corporate Veil Claim

May 3, 2024 | Uncategorized

Forming a business is a choice many people and entrepreneurs make to build toward personal success and, ultimately, generational wealth. However, starting a company is not without its risks, including the risk of being held personally liable for the debts of your business. People often assume setting up a Limited Liability Company (LLC) or a Corporation will, as their names suggest, shield them from personal liability. This isn’t always the case, and it’s important to understand how this can go wrong.

The legal shield separating personal assets from business liabilities, known as the corporate veil, can sometimes be pierced, leaving business owners exposed to personal liability. More and more business owners are finding themselves exposed to personal liability for business deals gone wrong. So, how can you protect yourself and your business from corporate veil liability?

Avoid Commingling Funds

Treating the LLC or Corporation as a personal piggybank, so to speak, is one of the quickest ways to have the government come snooping into your business and personal funds. Withdrawing funds from the LLC or Corporation to care for personal expenses must be avoided at all costs. The shield a business owner receives from being personally liable for the debts of the business is often referred to as a “veil.” Commingling of funds erodes the legal distinction between the owner and the business, making piercing the corporate veil more likely. The business must have a separate bank account. As a general rule, business funds should never end up in your personal account unless it is for a legitimate and documented business purpose. 

Government authorities closely monitor these practices and do not hesitate to impose penalties on those who blur the lines between personal and business finances. If the business is facing a lawsuit and you are commingling funds then the court may pierce the corporate veil and allow the plaintiff to pursue your personal assets to satisfy the debt of your LLC or Corporation.

Using LLC or Corporation assets to pay for personal expenses, like family vacations or personal debts, directly undermines the principle of limited liability. To maintain the integrity of your entity, it’s crucial to establish clear boundaries between personal and business finances, ensuring that all transactions strictly serve business purposes.

Avoid Operating an LLC or Corporation as an “Alter Ego”

We can’t stress it enough: maintaining the LLC or Corporation as a distinct entity from your personal affairs is vital. This separation is further compromised when you use company resources, letterheads, and tools for personal gain. Similar to using company funds for personal expenses, blurring the line between you personally and your entity’s brand further exposes you to risk.

This misstep is particularly common in single-member LLCs, where the line between personal and business might seem automatically blurred. However, even these entities need to engage in legitimate business transactions and maintain a separate financial and brand footing from the owner. Failing to do so not only endangers the business’s financial health but also places your personal assets at risk in the event of legal scrutiny or financial downturns.

Protect Your Personal and Business Interests with Rodriguez-McCloskey PLLCRodriguez-McCloskey PLLC offers expert assistance to entrepreneurs and business owners in navigating the complicated nature of business law, ensuring the protection of both personal and business interests. We are committed to finding innovative solutions to your legal problems and providing proactive strategies to safeguard your assets and wealth against the pitfalls associated with LLC and Corporate management. Contact the team at Rodriguez-McCloskey PLLC to protect your personal and business assets and prevent a corporate veil issue from arising or being established.