How do you prevent the corporate veil from being pierced?
Piercing the corporate veil is when a court sets aside a business owner’s limited liability protection. This means that the protection that LLCs and corporations offer their owners is removed. Courts rarely pierce the veil unless some egregious misconduct occurs.
Courts in MA have a test with twelve factors when determining whether it is appropriate to
pierce a corporate veil: (1) common ownership; (2) pervasive control; (3) intermingling of
business assets; (4) lack of capitalization; (5) failure to observe corporate formalities; (6) lack of corporate records; (7) no payment of dividends; (8) insolvency at the time of the litigation; (9) taking corporation’s funds by dominant shareholder/member; (10) lack of officers and directors; (11) using the corporation/LLC for transactions of the dominant shareholders/member; and (12) use of the
corporation/LLC in fraud.
The best way to avoid piercing the veil is to follow all necessary formalities (which include annual meetings, filing annual reports, creating operating agreements, recording meeting minutes, etc…). Also, entities need to keep business documents for seven years. You must keep business and personal assets separate. Ensure your business has the capital and assets to operate. And finally, use your business name for all official documents.
Starting a corporation or LLC is a great way to protect yourself; you must do it correctly. I can help you set up the entity properly to prevent any piercing of the corporate veil.