Your corporate veil is the shield that protects your personal assets from corporate attacks. The strength of your corporate veil is determined by how well you follow the laws, regulations and requirements of your corporation. Piercing the corporate veil sounds painful, and it is! When the corporate veil is pierced, the entity’s veil of limited liability is lifted and your personal assets are exposed to a creditor’s claims.
You want to focus on the separation between your entity and the owners of that entity. Know that one of the reasons to incorporate is to create that veil, so that you are not liable for the actions of the business—the debts, the mistakes, the liabilities of the corporation. The moment your corporate veil is breached, you are personally at risk.
Of course, the reason that anyone would attempt to pierce a corporate veil is because the corporation itself does not have enough assets to satisfy the claim. The creditor sees that the shareholders do have money, and seeks to get beyond the corporation to reach the individual’s personal assets. A recent study found that piercing the veil was successful 48% of the time. That is a huge success rate, and it points out that far too few entrepreneurs and investors are taking the necessary steps to protect themselves.
The previous is an excerpt from Chapter One of Run Your Own Corporation. For more information on how to create and maintain your corporate veil, read my blog on Corporate Paperwork and my book Run Your Own Corporation.