Should you operate your business as a sole proprietorship, partnership, corporation or LLC? You may have heard that corporations and LLCs offer liability protection for shareholders and members. You may also have heard that Nevada entities offer more protection. However, there’s a theory called “corporate veil” behind which shareholders and members hide behind. Let’s examine if such theory can hold up against creditors of Nevada corporation.
- A corporation or LLC has its own separate legal identity – separate and distinct from owners. That entity, not you, operates the business. It owns the business assets, owes business debts, collects business revenues and pays business expenses.
- As such, your entity offers some degree of liability protection since business problems can be kept in the corporation without exposing your personal assets; likewise, your personal problems do not expose business assets.
- Using corporations and LLCs to protect your personal assets has been referred to as hiding behind a corporate veil. Creditors want to pierce this corporate veil to get to your personal assets.
- The corporate veil that protects personal assets of the business owners can make a corporation or limited liability company (LLC) look attractive looking for asset protection.
- Nevada law provides strong protection against piercing the corporate veil where corporate owners can be held responsible for the actions of a corporation.
- Let’s take the case of two states: Anti-business California and business friendly Nevada. If your California corporation is sued anywhere, consumer friendly California law applies. Ouch.
- If your Nevada corporation is sued anywhere, business friendly Nevada law applies.
- If your Nevada corporation operates only in California and is sued in a California court, the California court would use Nevada law even if the corporation only operates in California and is simply chartered in Nevada as a flag of convenience (home base).
- Courts of law pierce the corporate veil if:
- There is no real separation between the company and its owners.
- The company’s actions were wrongful or fraudulent.
- The company’s creditors suffered an unjust cost.
- How to prevent courts from piercing corporate veil:
- Follow corporate formalities. Hold annual meetings of directors and shareholders or members.
- Keep written minutes of important decisions made at these meetings.
- Do not commingle assets. Do not pay personal expenses such as house mortgage from the business bank account. Do not deposit checks made payable to the corporation into your personal bank account.
- If creditors successfully pierce your corporate veil, courts impose personal liability on officers, directors, shareholders, and members.
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Victor Santos Sy graduated Cum Laude from UE with a BBA and from Indiana State University with an MBA. Vic worked with SyCip, Gorres, Velayo (SGV – Andersen Consulting) and Ernst & Young before establishing Sy Accountancy Corporation.
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He retired after 50 years of defending taxpayers audited by the IRS, EDD, BOE and other governmental agencies. He published a book on “How to Avoid or Survive IRS Audits” that’s available at Amazon. Readers may email tax questions to firstname.lastname@example.org.