The Evil Lawyer and the Pierced Veil

You want to form your business, and you don’t want to use a lawyer. Why should you? These days television commercials and online services tout “form your own Corporation” or “we provide all the documents you need to form your business”. Given the digital world in which we live and all the resources that are available to us, it is tempting to believe we can be our own doctor, filmmaker, auto repair tech, master chef, and even lawyer, all from the comfort of our desk chair.

It is not that complicated to form a business entity. It is certainly simple to order some business cards and almost anyone can create an online presence. You tap a few keys, whip out your credit card, and ..voila!… You are a business.

One of the reasons you decided to form a corporation or an LLC was because you heard it will “protect you from liability”. It’s true that these entities can serve that purpose. But lawyers like me are trained to figure out all the things that you did wrong that allow us to come after you personally and prevent you from hiding behind the wall of your entity. We even have a term for that. It’s called “piercing the veil”.

Unfortunately, the reality of the business world is that lawyers are a necessary evil. Certainly, the lawyers opposing you are always evil, from your point of view. Their job is to make sure that your corporation or LLC won’t save you.

If I wanted to pierce a corporate veil here are the first things I would look at:

Did you comply with all of the formality of corporate law that allows you to maintain your corporate shield? For example, did you properly adopt a working set of bylaws? Did you follow those bylaws to the letter and conduct annual meetings? Did you keep proper meeting minutes? Did your directors and officers act within their defined roles in making decisions regarding corporate operations? Failure to do those, and I am up your you-know-what.

If you minded your formality p’s and q’s, I can still get ya. I look to see whether your business operated as a business or did you operate it as your personal piggy bank? Did you pay your personal expenses out of the corporate entity? Did you take money home without paying yourself any salary (the IRS has strict rules about this). Did you execute documents using proper corporate formality?

There are boatloads of other mistakes that you can make that end up compromising what you thought was the “shield” of your business entity. You might have operated under a trade name that is different from your corporate name and that you didn’t properly register. You may have formed the corporation in a different state and failed to register properly to do business in this state. If I’m really lucky, you failed to file your corporate annual report on time and your entity is dissolved even though you think you are still operating under corporate capacity.

There are many things a business lawyer or corporate lawyer can do to prevent your business from getting into trouble. But there are few more important roles for a business lawyer than that of making sure the bad guys don’t pierce your veil.