| Most people form and use business entities for one | | | | requirements. Each state has different requirements, |
| primary purpose - to protect themselves from | | | | but there are a number of common arguments. |
| personal liability for the debts of the business. This | | | | 1. Co-mingling - If the owners of a business entity |
| protection, however, can be lost. | | | | co-mingle their personal assets with the assets of the |
| A corporation or LLC provides protection from | | | | entity, a big step has been taken to piercing the |
| personal liability for the debts of the business whether | | | | corporate veil. Acts of co-mingling can include paying |
| they are judgments or general debts to creditors. That | | | | for personal debts such as mortgages with money |
| being said, this protection can be lost in a number of | | | | drawn from the corporate bank account. |
| ways. Let's take a closer look. | | | | 2. Representation - When a business entity functions, it |
| Personal Guarantees - A personal guarantee is | | | | is the "person" doing business. If you sign leases, |
| exactly what it sounds like. A person with ownership | | | | contracts and such personally or accept revenues |
| interest in a business personally guarantees a debt of | | | | personally, you can run into problems. All contracts |
| the business. Such debts can be office leases or | | | | should be signed in the name of the entity and all |
| machinery loans. When you personally guarantee a | | | | revenues should be issued to the entity name and |
| debt, you take on the obligation to repay it. The fact a | | | | deposited in the corresponding bank account. |
| business is a LLC or corporation does not protect you | | | | 3. Formalities - If you fail to follow corporate formalities, |
| from that obligation. If you form either entity, do not | | | | you can run into issues. A corporation must have an |
| personally guarantee any of the debts! | | | | annual meeting. If you don't, a strong case can be |
| Piercing - There is a catch all phrase in the world of | | | | made that the entity was a sham. |
| business entities known as piercing the corporate veil. | | | | Criminal - No business entity will protect you from |
| This essentially means that a court reviews your | | | | criminal charges. It is designed only to deal with civil |
| business entity and determines it has not been run | | | | matters such as lawsuits. If you break the law, you are |
| correctly. As a result, the court disregards the | | | | on your own much as the individuals you have seen in |
| protection provided by the business entity and makes | | | | the news over the last few years because of |
| the individual shareholders or LLC owners personally | | | | corporate scandals. Think of Enron. |
| liable for the business debts. In practical terms, the veil | | | | If you take the prudent steps to run your business |
| of protection has been pierced. Obviously, this is bad | | | | entity, you should have little worry regarding whether |
| news. | | | | the veil of protection may be pierced. Fail to take such |
| Piercing the corporate veil is a difficult claim to prove. | | | | steps, however, and you have nobody to blame but |
| A plaintiff must show that the business entity was run | | | | yourself. |
| in a manner that did not comply with basic legal | | | | |