Piercing the Corporate Veil – Are you sure you’re a corporation?

A great man named George Costanza once said ‘it’s not a lie… if you believe it…” And this is just what many small business owners do – they lie to themselves by calling their business a corporation and then they say it and write it down so much that they believe it’s true. Well, the problem is that to properly be a corporation, you have to follow procedures. You have to have meetings to take certain actions, you have to take minutes at those meetings, keep records, and you have a fiduciary duty to the business. So, think about it –

  • Are you having meetings with your business partners (a.k.a. the directors)?
  • Are you recording votes and decisions?
  • Are you making sure that you aren’t usurping business opportunities that could benefit the business?

If you aren’t, then you just might find yourself on the business end of a lawsuit, and no veil to protect you.

It’s true that a Court will take into consideration many factors when deciding whether or not to pierce the corporate veil (i.e. allow you to be sued individually), it all really comes down to whether or not you’re calling yourself a corporation or whether you’re acting like a corporation. And this can be expanded to cover other entities like limited liability companies and limited liability limited partnerships. You can’t just file the paperwork and operate outside of the statutory procedures. When you file that paperwork, you’ve created an entity that is separate from yourself and your business partners. Frankly, step one is to know exactly why you’re creating the entity as you are, for example:

  • How does it protect you?
  • What do you have to do?
  • What are your duties to the entity?
  • What records must be kept?

These are questions that must have answers before you step out into the business world. This is also precisely why the initial investment in an attorney to help you choose and get set up for success is vitally important. Ask the attorney as many questions as possible. Ask him or her about the procedures, about the statutes, about the records, and ask for opinions on how to execute all of these activities to best protect you and remain efficient.

Here’s the point – you created a business to make money. You chose a business entity for tax purposes and for liability purposes. You can’t just call yourself a corporation, LLC, or limited whatever without following the proper procedures. If you don’t follow the proper procedures, you can find yourself being sued individually. Also, consider your fiduciary responsibilities… if you start treating business assets as your own or start taking business opportunities without the approval of your business partners, you may just find yourself being sued individually for a breach of your duties owed to the business entity. I know this may sound like I’m trying to scare you into a lawyer’s office, but that isn’t the point. The point is that you should at least seek legal advice so that you know all of the procedures and you can get set down a track that will allow you to operate within the law so you can focus all of your attention into making profits. It may not seem like a big deal today, but next time you start lying to you, don’t believe it. I can give you something to believe – when you get sued individually, and you lose that motion to dismiss, you’re going to regret not keeping those records and following those procedures.