Preventing "Piercing of The Veil" - Practical Tips For Food Companies - What to Do and What to Avoid (part III of III)
By guest blogger Jerry Chiang
The following list will help you preserve your liability shield and protect yourself from the liabilities of your corporation or limited liability company (“LLC”). This is not intended to be an exhaustive list but rather an illustrative list of activities that will either preserve one’s liability shield or undermine it.
Do’s:
• Properly capitalize the corporation/LLC, or in the alternative, obtain sufficient insurance to cover potential liabilities.
• Keep personal and business entity funds separate by creating a bank account for business entity funds and transactions.
• Hold oneself out as an officer or employee of the corporation/LLC.
• In transacting with third parties, make it clear that they are transacting with a corporation or LLC and not an individual.
• As a corporation, observe all formalities listed in your state’s corporation statute and the corporation’s bylaws. To learn more about Washington corporate formalities, visit the Washington Business Corporation Act.
• As an LLC, observe all formalities listed in your state’s LLC statute and the LLC’s operating agreement. To learn more about Washington LLC formalities, visit the Washington Limited Liability Company Act.
Don’ts:
• Avoid paying excessive dividends or distributions.
• Avoid below-market sale of assets to a shareholder, member or a third party.
• Avoid using business entity assets for personal purposes and vice versa.
Preventing "Piercing of The Veil" - Practical Tips For Food Companies - Introduction (part I of III)
By guest blogger Jerry Chiang
In starting any business enterprise, especially in the food industry, incorporating the business as a corporation or limited liability company is as important as having a good product or solid business plan. Incorporation is essential because it shields owners from the liabilities of their business. A lawsuit against the business will not impact the personal assets of the business owners because the law recognizes the corporation or limited liability company as a distinct and separate entity.
Incorporation by itself, however, is not enough. In order for the liability shield to remain in place, or for the law to continue to recognize the corporation or limited liability company as a separate entity, the entity’s owners need to observe certain formalities. If the owners are not careful, the law may treat the entity and the owners as one and the same and disregard the corporate entity. This is commonly referred to as “piercing the corporate veil.”
Over the next few days, this blog will give you an overview of what the courts look at when they decide whether to disregard a business entity and find its owners liable. We’ll also provide a list of dos and don’ts to help you avoid losing your liability shield.
For more in-depth discussion of the latest case developments on piercing the corporate veil, especially as it relates to LLCs, keep up with Doug Batey's blog, LLC Monitor.
