{"id":6806,"date":"2020-10-12T13:30:00","date_gmt":"2020-10-12T18:30:00","guid":{"rendered":"https:\/\/www.bgs.com\/blog\/?p=6806"},"modified":"2021-11-22T15:19:28","modified_gmt":"2021-11-22T21:19:28","slug":"the-corporate-veil-what-is-it-and-why-you-should-care","status":"publish","type":"post","link":"https:\/\/www.bgs.com\/blog\/2020\/10\/12\/the-corporate-veil-what-is-it-and-why-you-should-care\/","title":{"rendered":"The Corporate Veil: What is It and Why You Should Care?"},"content":{"rendered":"\n

You may have heard mention of the corporate veil<\/a> \u2013 the common term for the liability protections afforded to an individual (or entity) who creates a separate company to do business.\u00a0However, this protection is not ironclad. Read our blog as we discuss the corporate veil, what it is, and why you should care.<\/p>\n\n\n\n

The benefits of setting up a corporation or L.L.C.<\/strong><\/h4>\n\n\n\n

For purposes of our discussion, let\u2019s assume Ellen runs a canoe making business out of her garage called Handcrafted Canoes. If she doesn\u2019t create a corporation or limited liability company<\/a> (or other liability limiting entity), she is personally liable for all of the debts of the business. In other words \u2013 her personal assets are subject to claims relating to the business. Ellen\u2019s smart attorney advises her to set up a corporation, and Ellen takes the advice. Handcrafted Canoes, Inc. (HCI) is formed as a Minnesota corporation.<\/p>\n\n\n\n

But is that the end of the story? If Ellen\u2019s only act is to set up the corporation, and she doesn\u2019t actually operate her business as a separate entity, creditors of her business may be able to get past that  corporate \u201cveil\u201d and proceed against her personal assets.<\/p>\n\n\n\n

Piercing the corporate veil<\/strong><\/h4>\n\n\n\n

Parties that do business together have a reasonable expectation that if something goes wrong, the wrongdoer will be held accountable. When the wrongdoer is an entity, the owners aren\u2019t personally liable, only the entity is, and this should be the reasonable expectation of all the parties. But what if the parties don\u2019t KNOW a corporation has been formed? Knowing who\/what we are dealing with sets our expectations for options if things go wrong.<\/p>\n\n\n\n

If Ellen has a personal canoe collection worth millions, but I know I am contracting only with her corporation, I should understand that I won\u2019t be able to get at her collection if I have a judgment against the corporation.\u00a0But what if Ellen never tells me she has a corporation, and all the paperwork just has her personal name on it? I might decide to buy a canoe from her because she would seem to have the means to fix errors that are made.\u00a0An action against Ellen by creditors who didn\u2019t know they were dealing with a corporation is an action to \u201cpierce the corporate veil<\/a>.\u201d \u00a0<\/p>\n\n\n\n

Minnesota Laws<\/strong><\/h4>\n\n\n\n

In Minnesota, courts will generally look at the following factors when deciding whether a shareholder can be held liable for company debts (i.e. deciding that the shareholder didn\u2019t run the corporation like a separate entity):<\/p>\n\n\n\n

  1. Insufficient capitalization<\/a> of the corporation (i.e. not enough money to start doing business)<\/li>
  2. Failure to follow corporate formalities, including record keeping (i.e. no corporate record book, no elections, no minutes, no documentation of meetings to make decisions)<\/li>
  3. Insolvency of the company at the time of the transaction at issue<\/li>
  4. Excess taking of funds by the owner (taking too much money or using the company bank account to pay personal bills)<\/li>
  5. Failure of the officers to actually act in that capacity<\/li><\/ol>\n\n\n\n

    Best Practices<\/strong><\/h4>\n\n\n\n

    In practice, it\u2019s fairly easy to make sure the world knows it is dealing with an entity, and not an individual. Here are a few best practices:<\/p>\n\n\n\n