One of the main advantages of incorporating your business is that you are no longer personally liable for the obligations of this business. In other words, creditors or lien holders can only use the assets of the business to satisfy obligations or debts incurred, leaving the owner's assets out of the reach of their long tentacles. This protective barrier that separates business responsibilities from personal ones is known as the corporate veil.
It is not enough to register the entity to enjoy these significant benefits. It is necessary to follow some protocols and procedures. Under certain circumstances, the protection of the veil can be invalidated and put your personal assets at risk. Below we will explain the four most common ways in which the corporate veil can be pierced:
Failure to keep corporate documents and records organized:
Operating a business as a corporation differs from operating it as a sole proprietorship or LLC. The first requires compliance with formalities that include annual meetings. Write resolutions, and appoint officers, directors, and executives. File the relevant tax returns and so on. To prevent the Veil from being annulled for this reason, carefully follow what the law instructs and respect the procedures for this kind of entity.
Inappropriate capitalization of your business:
This usually occurs when an entity does not have sufficient funds at the time of its formation to cover possible claims. It can also occur when the owner regularly incurs debts or responsibilities without having sufficient funds or cash flow to cover them. The owner of a business cannot and should not hide behind the corporate veil to request loans in the name of the entity and then fail to repay them. To avoid this problem, don't commit to any kind of liability that your business is not reasonably able to repay.
Not using the company name in transactions or operations:
It is mandatory and necessary to use the company logo and name in all contracts and marketing materials. Although it may seem like common sense, it happens all too often that owners use their names and signatures on these types of documents, putting not only the entity but also their personal assets at risk. All contracts and transactions must be signed in the name of the company, and the owners must appear as representatives of the entity (President, Vice President, Manager, etc.) unless there is going to be some endorsement in a personal capacity. Be very careful with Marketing. All cards, brochures, or banners must clearly state that the business operates as an incorporated or joint venture. To avoid problems in these cases, make it a habit to use the company name in everything related to the business. Only sign personally followed by the executive position you hold, such as president, manager, or secretary.
Mix(commingle) personal funds with business':
This is probably the most common mistake we have witnessed in our experience advising clients. This primarily occurs when company bank accounts are used for personal expenses. Let us keep in mind that a business is not a savings account where we can withdraw and deposit funds as we wish. A clear distinction needs to be made between business finances and personal accounts. Bear in mind that the entities are independent, each with its assets, debts, and legal documentation. To prevent the protection of the veil from being pierced, do not mix your personal and company funds. Do not pay personal debts with business capital and vice versa without doing the proper procedures. Of course, you can use funds from your business for personal expenses. First withdraw the money as a capital distribution, and then enjoy the rewards of your hard work.
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