How to Protect and Maintain Your Corporate Veil

How to Protect and Maintain Your Corporate Veil

The primary reason that business owners choose to operate their companies as limited liability entities — corporation, limited liability company (LLC), limited partnership or limited liability partnership — is for the personal asset protection these entities provide.

That protection is known as the corporate “veil” or “shield,” and unless it is properly maintained, you could lose your limited liability protection.

Piercing the Corporate Veil

Under certain circumstances, a limited liability entity’s corporate veil may be pierced and its owners left unprotected from creditor claims. Here are the two most common ways a corporate veil may be pierced:

• If a business owner fails to properly maintain the integrity of the limited liability entity;
• If a business owner, officer or manager engages in bad acts that result in injury or loss to a creditor.

Ways to Avoid Piercing the Corporate Veil

Have an operating agreement. An operating agreement helps establish the company as a separate entity from its members in the eyes of a court. Even if you are the sole owner/manager of an LLC, you should create an operating agreement that details your rights and duties. Florida has a statute that acts as a default operating agreement in the event that the LLC does not have one. It is advised to have one custom tailored to your LLC.

Don’t commingle funds. The limited liability entity should have a separate bank account, distinct and separate from any personal accounts of its members. All company funds should be deposited and drawn from this account.

Document transactions with name of LLC. All business transactions should be signed in the name of the limited liability entity , not the name of any individual owner, officer or director.

Maintain organizational documents. Many courts have considered the absence of any company meeting records to be an indication that the entity is being disregarded and will pierce the corporate veil. There are rules for the proper maintenance of a corporation, LLC or limited partnership that your business attorney can help you ensure you adhere to in order to maintain your limited liability protection.

Avoid misconduct. If you break any laws or if incur business debts you know the company will not be able to pay, this may negate the limited liability protection and a court could allow a creditor to come after your personal assets.

Have adequate insurance. A limited liability entity does not necessarily protect you from liability from injury or other claims of third parties. Be sure you have the proper business insurance to protect you against negligence claims.

Florida business owners can avoid unnecessary risk by consulting with a qualified Florida business attorney. Contact Jurado & Farshchian, P.L., at (305) 921-0440, or email us at info@jflawfirm.com.

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