Most business owners understand the importance of keeping your business separate from your personal estate. You may have done your homework and weighed your options. Perhaps you’ve even considered the tax and non-tax implications for common business entities. We bet you’re also intrigued by the protections certain business entities (such as Nevada LLCs) afford their owners. The “corporate veil” that protects personal assets of the business owners can make a corporation or limited liability company (LLC) look incredibly attractive.
To many, the word “veil” conjures up a sheer, flimsy, ethereal piece of material—perhaps fluttering behind a beautiful bride. And yet, this same term is used by many business owners to describe the personal asset protection provided to owners of a corporation or LLC. Of course, with the right strategy you can make your veil much stronger than the one worn by a bride.
Here’s what you can do to make your veil puncture-proof.
Corporation & LLC Asset Protection: How Does it Work?
Corporations and LLCs are statute-created business entities, meaning they have been created by the legislature of your state. Nevada has – pretty much- the best asset protection laws for business entities (as well as Nevada Asset Protection Trusts). This is ne of the top reasons why many business owners, throughout the country, choose to form their LLC in Nevada.
Courts view corporations and most LLCs as distinct entities separate from the people—the owners—who comprise them. For this reason, the owners are not held personally liable for the business debts . . . unless a court decides to “pierce the corporate veil.” Piercing the corporate veil involves the court disregarding the entity’s separate status and holding its owners liable for the business debts, putting the owner’s personal property on the line.
Bottom line: When the veil is pierced, you can lose personal assets (your home, car, bank accounts, or more), even if you did nothing wrong.
WARNING: The smaller and more closely held the business, the more intensely the court will scrutinize it. Small business owners must pay particular attention to this issue!
How to Make Your Corporate Veil Strong
First and foremost: Consider forming your entity as a Nevada LLC (read more about the many reasons to consider a Nevada LLC here).
To figure out what type of business entity is best for your business & asset protection goals, consult an Asset Protection Attorney. Corporations and LLCs (I favor Nevada LLCs over corporations for the vast majority of situations) are excellent business entity choices for protecting the owner’s personal assets from creditors.
But- even with the best choice of business entity- the protection is only as good as your commitment to respect the “corporate formalities” (i.e. to maintain the entity as a proper business entity).
Here are some specific business practices you should consider implementing to maintain your business & its asset protection:
Follow the Rules!
For business transactions, always use the business’s full legal name and sign all documents in your formal capacity.
Follow the corporate bylaws or LLC operating agreement and amend them when necessary.
Uphold all statute-mandated formalities (i.e., follow the law).
Don’t Commingle!
Keep business funds in separate bank accounts from personal funds.
Make sure the business is adequately capitalized.
Update, Update, Update!
Make sure to keep your entity in active status with the appropriate state agency (in Nevada, business entities are filed with the Nevada Secretary of State)
Ensure your Operating Agreement & Membership Certificates (for LLCs) or your By-Laws & Stock Certificates (Corporations) are updated anytime there’s a change in ownership, management, etc.
Considering booking a standing annual appointment with your business attorney to discuss any changes/updates that may be needed- like an "annual physical" for your business.
Attention to detail and treating your business as a truly separate legal entity is essential to maximizing the protection the corporation or LLC provides to its owners. If you are relying on a corporate veil to protect your personal assets, make sure that veil is made of Kevlar®.
We Can Help!
We are here to help your business meet all of the formal statutory requirements to protect your corporate veil and offer additional guidance. With our expertise and experience, you can leave the legal headaches to us and focus on what matters most to you: Growing your business and protecting your legacy!
-by Tiffany Ballenger Floyd, Esq. (Nevada Asset Protection Attorney), © 2019, Phillips Ballenger, PLLC
Photo by marcos mayer on Unsplash