“Draw the Law” is a weekly short post where I try to visualize a legal concept. It is designed to be helpful to the laymen and for a quick understanding. For the next several posts I will be detailing organizing and operating a business.
Last week I discussed the limited liability shield of certain business entities. This is how a business owner’s personal assets are protected from the obligations of the business. But, why is that case? Simplest answer is that they are two different persons.
Separate Entities
Say that again?! The law treats the business owner(s), in the case of corporations and limited liability companies, as two separate persons. Yep, that’s right a corporation or llc for legal purposes is a separate person than that of the living, breathing human person running/operating the company.
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The business owner, who is a person, is separated by a a veil (shield) from the business, and the business itself is also a person.
What does that mean?
It means the corporation or llc is affected the same as a person. It means that the following can occur:
- sue others and be sued by others;
- buy/sell/own property;
- take personal actions;
- be criminally punished for illegal actions (except imprisonment); and
- exercise most protections and rights afforded to people.
So as you can see whatever legal actions you can take or happen to you can also be done or happen to a company because it is a person.
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A business is its own separate identity and can behave like a person in terms of legal actions.
Thus when there is an obligation to pay the obligation is on the company and not the individual business owner. This is why the banks need the personal guaranty to get at the owner’s assets. If it helps with this concept think of the shield as another person.
When Two Persons are Really One: Piercing the Corporate Veil
While the personal guaranty is one way around the shield/separate person, business owners will be treated as one as the same as their company if they really act in that manner and act fraudulently. Basically, if the people who started the business really only created it to try and perpetrate a fraud upon people who lend or deal with their business then it would be the case there is no separate person. The business is a front. In the law, we call it “piercing the corporate veil.”
Clik here to view.
A lawsuit will “pierce the corporate veil” if the owner is treating the company as if it was a front.
Therefore, many attorneys urge their clients to treat their corporations and llcs as separate entities and not their own personal piggy bank. Some of the biggest things that will cause business owner(s) to lose that shield and cause a court to “pierce the veil” are the lack of formalities, especially in a corporation. These are those things like holding board meetings, taking down minutes, and recording major decisions. In addition, commingling of funds, assets, and personal use of those items also could cause a court to treat the company as if it was not there.
Think about it this way, when you create a company, you start by filing paperwork with the state. When the state grants you your charter, its like your company’s birth certificate, it expects your company to be a separate person from you that’s why you went through all that trouble to start it. Bottom line: if you act like the company is not there, then why should the court or anyone else believe it is there?
So what did we learn?
A corporation or llc is a shield, person, veil. Basically, the company is a separate person from the owner(s) unless they do actions that would make it seem that the company does not exist. If that is the case the two persons, owner and business, are really one in the same and a court will disregard the limited liability.
An attorney can help draft and file your paperwork with the state and get you started. In addition, an attorney can advise you on what is the proper route in keeping your business’s actions as its own and insuring that you two remain separate entities.
See you on the next draw!
*Disclaimer: This post discusses general legal issues, but does not constitute legal advice in any respect. No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction. Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.