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Preserving Corporate Protection

Just because you have a corporation doesn't mean that creditors will not attempt to sue you personally to collect a corporate debt, or to hold you personally responsible for some corporate misfortune. Corporate creditors frequently try to pierce the corporate veil to claim the personal assets of shareholders, officers and directors. Most commonly, the creditor's claim is that the owners are alter egos of their corporation and they can be successful if the business owner fails to follow elementary corporate formalities.

The key is to correctly operate a corporation (or any other legal entity) and to manage the entity independently from any personal finances or a corporate creditor could succeed in claiming that you and your corporation are one and the same, in which case you could lose corporate protection.

Ways to prevent this from happening include:

  • Don't commingle assets: Always conduct business as a separate entity and separate your personal finances. Always document assets transferred between you and the corporation on both personal and corporate records and fully document financial transactions between affiliated corporations or other entities.
  • Promote your corporate status and always sign as a corporate agent: When operating as a corporation, your legal documents should always say so by disclosing your corporate name and title on all contracts and documents. It is important to sign all documents as an officer or agent of the corporation and not as an individual.
  • Operate corporations independently: If you own multiple entities it is important to have the officers or directors of the related corporations occupy different positions, conduct separate corporate meetings and maintain separate corporate records to avoid any confusion as to the independence of each entity.
  • Keep accurate corporate records: Creditors can pierce a corporate veil when corporate records do not properly document key corporate actions. Always record major director and shareholder actions with detailed minutes, resolutions and other documentation. Inexpensive software can help you quickly prepare corporate records without the assistance of a lawyer.
  • Never voluntarily dissolve a corporation: Dissolving an entity could cause you to lose corporate protection. Always pay corporate taxes and franchise fees to keep a corporation in good standing with the state in which it was formed. Do not voluntarily dissolve a corporation if it has outstanding debts, as these corporate debts will then automatically become personal obligations to you as its stockholder. Observe corporate formalities including identifying a unique business address and telephone number, retain cancelled checks to show that your corporation pays its independent expenses, maintain accurate business licenses and document separate checking and savings accounts. Each of these compliance obligations establishes your corporation as a legitimate and separate entity and creditors trying to pierce the corporate veil on the claim that the corporation is only a stockholder's alter ego will have a difficult burden of proof in court. Most courts reluctantly dismiss a corporation's liability protection unless its owners flagrantly ignored these (and other) corporate obligations. A business creditor's lawsuit against the corporate owner is usually only an effort by the creditor to force the business owner to defend the lawsuit or settle.


The best defense is a good offense.