The corporate veil definition is a legal concept that separates the actions of an organization to the actions of the shareholder. In addition, it protects them from being liable for the company’s actions. It does not necessarily mean that the protection is always in place. A court can also determine whether they hold shareholders responsible for a company’s actions or not.
“Piercing the corporate veil” refers to a circumstance in which courts set aside limited liability and hold a company’s investors or directors personally liable for the organization’s activities or debts. Corporate veil piercing is common in closed corporations. While the laws vary from state to state, courts will generally abstain from piercing the corporate veil unless there have been signs of serious misconduct.
Components that a court may consider when determining whether to pierce the corporate veil incorporate the following:
It is critical to take note that not all of these aspects should be met all together for the court to pierce the corporate veil. In addition, a few courts may find that one factor is so convincing in a specific case that it will find the investors personally liable. For example, numerous large enterprises don’t pay dividends, with no indication of corporate indecency. But for a small or closely held company, the inability to pay dividends may indicate financial indecency.
There are various ways to ensure you are safe from being liable for a company’s wrongful actions. Read to following ways protect yourself:
The answer to this seems somewhat obvious: keep everything separate. Probably the most important area for separateness is in the financial arena. Document all transfers between the companies. In addition, do not be afraid to have inter-company contracts (i.e. lease agreements, notes, and contribution agreements). Then allocate expenses (including salaries) between the companies so that each pays it’s share. Have policies in place. In addition, practice keeping everything about the businesses separate. You may also consider having separate boards of directors and offices if that is practical.
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