Ask any business owner why they incorporated their business and one of the reasons they’ll give is “to protect myself from business liabilities.” But incorporating doesn’t mean you can never be held personally liable. Although it’s rare, courts sometimes ignore the legal protection of a corporation to hold an owner personally liable (a process called “piercing the corporate veil”).
The good news is there are steps you can take to avoid having a court pierce the corporate veil. Piercing happens when the court decides that you, as a business owner, haven’t really treated the corporation as a separate entity. In Wisconsin, the same theory applies to LLCs and their members as well. Essentially, the courts are saying that if you want the protection of incorporating, you have to follow corporation rules.
To avoid piercing:
- Always follow corporate formalities, like holding annual meetings, keeping minutes and filing with the state on time
- Never mix corporate assets with your personal ones (or those of another corporation or LLC)
- When setting up your business, make sure it’s adequately funded. Courts are more willing to pierce an “undercapitalized” business
- Always identify your business as a corporation or LLC so customers and creditors are on notice that your business has limited liability. Also identify your title so they know you’re acting on the business’ behalf
- Never use your business to engage in illegal, fraudulent or reckless activities (and get the advice of an experienced business attorney if you aren’t sure)
Having a court pierce your business’s veil can be devastating for you as an owner. But by following the rules, you won’t give the courts a reason to pierce. That way you and your business can take advantage of the protections offered by corporations and LLCs.