Avoiding your Corporate Veil to be Pierced

… And have your shareholders shouldering the liability for debts and other obligations.

If you are a businessperson, it is very important to have a solid corporate structure in order that your business' shareholders assets are protected well enough from the corporations' debts and other liabilities. This situation is possible if your corporation is being treated as a different or separate entity from its owners. It should also observe the formalities of corporate ethics as required by the laws governing it.

A distinction must be solidly set between the owners or shareholders of the business and the corporation, otherwise a creditor in pursuit of the payments for debts and obligations may be able to ignore the whole entity of the corporation and rather go after the assets of individual shareholders.

If your corporation start facing this kind of pursuit from creditors, then it can be considered that, your corporate veil has been disregarded or pierced. Upon the occurrence of this, your shareholders become personally liable for the debts and other obligations being sought by creditors.

Consequently, the law will then impose the liability against the corporation's shareholders instead of the corporation itself since their entities were not established separately. The personal liability that is imposed against the shareholders would have a likely undesirable result on their personalities, though.

In order for your business to avoid this inconvenience and the undesirable outcome from it, here are the following things to keep in mind, according to the general principles of the corporate laws:

• Preserve your company's corporate records in strictly professional manner. If you are incorporated in California, then make sure that the way your significant corporate records are kept in compliance with the state of California Corporation's Code.

If you fail to comply strictly with these codes, chances are if your case goes to trial, the courts may be given a major reason to consider whether your corporate veil could be pierced.

According to the laws, it is compulsory for the corporation to hold regular annual meetings of its shareholders and regular annual meetings of its Board of Directors. These meetings may become actual meetings wherein the quorum required is met, they can also be held based "on paper", or the "Unanimous Written Consent in Lieu of Meeting" is drafted and enforced on all persons who should be present for that particular meeting.

Moreover, any kind of extraordinary transactions need to be clearly documented through a shareholders or directors' "Special Meeting." In every time these meetings have taken place, the written consents or minutes of the proceedings need to be transcribed on its appropriate place in your company's corporate book. It should be continuously maintained as long as the corporation exists.

• Shareholders of the corporation must invest sufficient amounts of capital depending on the nature of the business. They must not just lend the company with their money.

If ever a court finds out that the company has no sufficient capital to operate, it may permit the creditor to look into the company and hold its owners liable for the debts and obligations made by the company.

Remember, the courts have long established that companies with inadequate capitalization fund may be considered as "shams."

• Maintain your corporation's identity separate from you and other owners or shareholders. Do not use the assets of your corporation, as they are the same assets as yours or execute documents indicating yourself as a corporation officer. Avoid placing the income of the corporation into its account. Do not mingle the shareholders' assets with that of the corporation's assets. Always use the company's full name including the "Inc."

• File the corporation's tax returns as required by the Federal and state governments. Your corporate attorney can help you also in completing the Secretary of State's form that need to be filled up with information then mailed in, called the "Statement of Information."