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The Nightmare Continues: Piercing the Corporate Veil
So this opener went through multiple iterations before we decided that no respectable business law blog starts with a shower reference, but let’s just get right into it. If this were the movie Psycho, the shower curtain is the corporate veil, Norman Bates is the sneaky individual or entity looking to take your life . . . errr . . . personal assets, and here’s the kicker: the knife is your failure to follow corporate formalities.
If you thought the last business blog was scary, it gets scarier. How scary, you ask? It’s every business owner’s worst nightmare: you set up an LLC or corporation believing your personal assets are safely locked behind the “corporate veil,” but one wrong move, and suddenly that protection splinters, and someone breaks through that corporate veil faster than Jack Nicholson with that damn axe. You don’t want your entity’s limited liability being as much of a laughingstock as Carrie was to her high school classmates. ***Insert ominous musical break here***
Here’s Johnny! You are not Your Business
Look, we all live and breathe our businesses. Sometimes it’s hard to separate our careers from our individual identities. Save it for your therapist friend, because a clear divide between the corporate entity and the individual (i.e., the corporate veil) is absolutely essential to protecting your individual assets. While the term “piercing the corporate veil” sounds like a niche legal doctrine, it’s a real thing and often the subject of costly, drawn-out litigation. When a court “pierces” that veil, it allows plaintiffs to reach the business owners’ personal assets like their bank accounts and homes. This American horror story is avoidable, provided that corporate formalities are followed.
Risk factors that invite veil-piercing include: commingling of business and personal assets, using business funds for personal purchases, failing to document major corporate actions via resolutions, failing to file separate tax filings, and the biggest red flag of all: using the entity to commit fraud. Once that corporate veil is pierced, the protection is gone, and every asset is suddenly exposed. The walls that once kept out your foes collapse, and creditors break through like a masked killer. Now, you’re in the sunken place. The court’s then left to decide: “Who will survive and what will be left of them?”
Corporate Formalities: The Salt Circle You Need
Document everything. Wait, we’ve said this before . . . is this . . . a premonition? No. We’ve actually said this so many times we’re almost sick of saying it, to Exorcist proportions. Here’s the deal: if it’s not written down, it doesn’t exist. Courts look for proof that your business operates as a truly separate legal entity, and your records are a huge part of that proof. Keep clean, detailed documentation of major decisions, contracts, ownership changes, and financial transactions. Minutes, resolutions, invoices, and bank statements all help build the wall between you and your company.
When you fail to keep adequate (and accurate) records, the line between “you” and “the business” starts to fade, and the fog gets thicker and more treacherous. Without that paper trail, a creditor or plaintiff can argue that your entity was nothing more than your evil alter ego. So, treat your corporate documentation and financial books like your salt circle: draw it carefully, keep it intact, and never assume the voices in your head vs. a written document will save you when things get spooky.
If you’re drowning in your business and you aren’t sure how to keep things in the right place to avoid individual liability: perhaps you’re gonna need a bigger boat . . . though as always, if you’ve got questions, you know we’ve got answers!
~ The W + K Team
ABOUT WEINSTEIN + KLEIN P.C.
Founded in 2019, Weinstein + Klein is a modern boutique law firm that serves as outside general counsel to businesses across industries. Weinstein + Klein provides strategic, day-to-day legal support with a focus on labor and employment law, corporate and transactional matters, and business litigation. Weinstein + Klein works closely with business owners, executives, and entrepreneurs to proactively manage risk, navigate complex employment issues, and handle key transactions – from formation to funding to exit.