Steps Owners Must Take To Limit Personal Liablity For Debts of the Corporation: Protection Against Piercing The Corporate Veil
Creditors often want to "pierce the corporate veil" to hold shareholders accountable for corporate debt. The following provides a basic overview of the steps shareholders of corporations can take to minimize the risk that they can be held responsible for corporate debts. This will protect their personal assets from being seized by creditors to satisfy corporate debt.
It is imperative that money and/or assets are contributed to adequately capitalize the operations of the corporation.
Operate Corporation Separate From Owners
It is imperative that a separate bank account with a employer identification number (EIN) be employed by the corporation. Only corporate expenses should be paid from such accounts. No personal expenses should be paid with corporate assets. No commingling of corporate assets with personal assets should occur at any time. If money is loaned to the corporation by shareholders such loan should be fully documented and authorized, recorded and ratified in the minutes of the corporation. The same steps should be effectuated for loans to shareholders by the corporation.
Be Sure To Keep Separate Books and Records and To File All Corporate Tax Returns
Separate accounting records need to be kept and documentation must be retained and preserved for the corporation. All corporate tax returns must be filed regularly and on a timely basis at the federal, state and local level.
Follow Corporate Formalities
It is imperative that regular and/or annual minutes of the board of directors and shareholders be held and that written minutes memorialize, ratify, and confirm such events and actions taken by the directors and officers of the corporation. Any related party transactions such as shareholder loans to the corporation or loans from the corporation to the shareholder must be documented and detailed in the minutes. Any tax elections or inter-company loans between affiliates must be documented. In addition, any significant actions taken by corporate officers should be documented with contracts and inserted into the minutes.
This is just an overview and not nearly an all inclusive list as to the steps involved in good corporate housekeeping for the protection against creditor actions to pierce the corporate veil. If your corporate minute book is just sitting on a shelf and never been updated you are looking for trouble. If you think that if you can just document your corporate activity and "back date" minutes think again. Litigation lawyers are wise to this game and when a law suit arises it will be too late. So get going with regular or at least annual minutes to protect your personal wealth. The cost is a lot cheaper than losing a lawsuit and being held personally responsible for corporate debt. Contact our office if you want to get compliant in this very important matter and you want to protect your personal liability and wealth.
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