One of our main concerns in the estate planning process is asset protection. There are unique asset protection concerns for our estate planning clients who own businesses. For example, did you know that if you own a business, even if you operate a corporation or limited liability company, the business’s creditors could potentially go after your own personal assets? That process is called “piercing the corporate veil,” and this article is a brief summary of how that works.
Business owners often organize their company into an entity, like a corporation or Limited Liability Company (LLC). This is done specifically to limit each individual owner’s personal liability. Piercing the corporate veil allows creditors to reach through the corporate structure and collect a business’s debts from the business’s shareholders or owners.
In order for a creditor to pierce the corporate veil, it has to prove certain factors that can be hard to prove in court. These factors include:
- Defective or Inactive Formation: If the owners did not meet the legal requirements needed to form the entity, whether it is a corporation or LLC, then no entity exists to shield owners from liability. Likewise, each state imposes annual franchise fees or report-filing requirements on entities. If a company fails to keep up with these, the corporation or LLC will legally cease to exist, resulting in owner liability. This happens frequently. Don’t let this happen to you!
- Undercapitalization: If a company does not have a reasonably sufficient amount of capital to pay its expected debts, this shows potential undercapitalization, which could be grounds to impose liability on the owners.
- No Separateness of the Company: If business owners are interchangeably doing business in their own name and sometimes in the business’s name, this lack of separateness could justify piercing the corporate veil. A lack of separateness is also evident if there is commingling of company and individual assets, or transferring of assets between the company and an owner without formalities. A common mistake is to put company checks in your personal account or to pay company bills from your personal account. This is a recipe for disaster.
- Excessive Dividends or Other Payments to Owners: When owners are actually working for a corporation or LLC, they can usually pay themselves fair compensation. But if they are giving themselves additional dividends and other non-compensation distributions, without any business accounting, this could expose owners to individual liability.
- Record Absence or Inaccuracy: If corporate or LLC records are missing or inaccurate, this can form a basis to pierce the corporate veil, especially if they hinder a creditor’s collection efforts against the company.
- Misrepresentation or Unfair Dealings: Deceptive practices such as dishonesty, false statements to corporate creditors, and asset concealment can make owners liable for corporate debts.
We counsel clients regularly on asset protection. We are sensitive to the unique concerns of our business owner clients, and take into consideration any issues that could implicate business owner liability. The Astill Law Office has provided high quality legal services for over 30 years. We specialize in wills, trusts, estate planning, and asset protection. If you have any questions about asset protection, contact The Astill Law Office at 801-438-8698.