LB&S Breaking the Corporate Veil Article Draft V1.0
Breaking The Corporate Veil:Why Your Personal Assets Are at Risk and You Didn’t Even Know It
Let me tell you a quick story about Bob.
Bob decided to start a business and doesn’t want his personal assets to be at risk.
Bob decides to protect his personal assets by Incorporating his business.
Bob thinks, “Great, now I can’t be personally held liable for my business.” Right?
In fact, Bob is even more at risk than he was before he incorporated and he doesn’t even know it!
Before I go any further let me take a quick moment to introduce myself. My name is Michael Lightfoot. I am a business attorney that specialized in intellectual property protection. I was the lead technology attorney at Motorola Corporate Research & Development for over 11 years and have participated in numerous cases where I have seen individual business owners lose EVERYTHING because they made the mistake of thinking incorporating was enough to protect themselves.
NOW LET’S GO BACK TO BOB FOR A QUICK MINUTE.
Bob started his business and in order to protect his personal assets, he did what any normal business person would do. He sets up a corporation or LLC and Bob thought that by doing so, he would not be personally liable for his business.
BUT HERE IS WHAT BOB DIDN’T KNOW…
Business owners are REQUIRED by LAW to follow certain CORPORATE FORMALITIES, and failure to do so can result in the breach of the limited liability “veil” around your business, breaking the legal barrier that protects your personal assets (such as your HOME, all the way up to your LIFE SAVINGS), from being at risk.
In short, corporate formalities are the actions a business must document to maintain the legal separation between the assets of the business and the assets of the owners. This legal separation between the business and the owner, the founders, and the shareholders is frequently referred to as the corporate veil, and it shields the personal assets of the aforementioned persons from liability and lawsuits.
The “Limited Liability” that comes with a corporation (or an LLC) is conditional.
Now, what if I told you that there were 7+ corporate formalities that you MUST be documenting to be safe? Do you think you have them all covered?
The truth is there are many more corporate formalities than that, and in order to be 100% sure you are safe you will have to obtain a list from your state’s Corporation Department.
Due to the complexities of corporate formalities required by individual states, as of 2014, 72% of businesses in the United States were found to be failing to follow corporate formalities fully.
STILL THINK YOU’RE NOT AT RISK?
If so, let me ask how much of the following paperwork do you currently have readily available in case of an audit or lawsuit?
Failing to do any of these formalities could expose your business and put your personal property at risk. This is especially true if you operate as a Sole Member LLC or Sole Shareholder of a Corporation. It seems silly to have to officially issue shares to yourself if you are the only one in charge, but failing to do so could cost you everything.
So what does all this actually mean?
If you have read to this point then by now you must be wondering, ”What do I do to get all this in order and ensure I’m protected?”
We have a solution BUT, first you must understand why corporate formalities are so important to a business. Otherwise the rest won’t make any sense and you’re doomed to miss something.
Let’s start by looking at a few REAL WORLD examples.
Three company founders shake hands and agree that each of them owns 33% of the business. Five years later, there's no proof this happened and one founder has died. Her spouse sues the company demanding 50%, and there's no paperwork to back up the other two founders in court.
A shareholder lends money to the business early in its life, and a few years later they take that money back. The IRS audits them and there's no official record of them loaning money: it looks like they've stolen from the company. They have to sell their house to pay the taxes and fines.
The CFO decides that her company needs more capital for a new investment, so she takes a loan out for a million dollars. She was never officially elected by the shareholders as the chief financial officer, so she didn't have the authority to get the loan. The bank sues her for fraud.
Two friends create a business, one designing the product, the other marketing and selling it. The marketer assumes a 50/50 split, but the designer views their contribution as more important: they want 75/25. The designer decides to sue, and the marketer has no paperwork to support his 50/50 claim. The courts side with the designer. *
*Note: These horrifying experiences are all based off of true events told to Legal Book & Seal by attorneys and other business owners.
The proper paperwork could have solved each of these issues, but because Corporate Formalities were not followed, business-killing problems arose. The courts or the IRS or “wronged” investors or even ex-officers or employees intervene, and the hard questions come up.
“When was your CFO elected?” We had to do that?
“Who are the shareholders who authorized the election?” We haven't issued any shares, have we?
“Why did you transfer $100,000 from the business account to your personal account?” It was my salary! “Where is it written how much your salary you should be getting?” I didn't record it, I just decided that much was sufficient...
“Who is the majority shareholder?” My partner? Me? An even split? We never decided.
Once the hard questions start coming, it takes very little for the courts to deduce that something fishy has been going on EVEN IF IT WASN’T.
In short if it’s not documented then it’s not “OFFICIAL” and in the court of law you can ALWAYS lose the argument.
In recent years business law has shifted, and there has been a large push to prevent companies acting as the “alter-ego” business of the owners and taking unfair advantages. That means that in today's courtroom, paperwork needs to be filled out, filed and in proper order. Excuses of forgetfulness or ignorance raise the ire of the courts and can land you in serious trouble. Without the proper documentation, spouses, ex’s, the IRS, etc. can bypass the business and target the people who are supposed to be protected.
Yes, they can target your house. They can go after your bank accounts and any other capital assets you possess to pay the legal fees, fines and back-taxes.
In spite of all the risk involved in running a business we do have some good news for you today! The NUMBER ONE reason most businesses fail to ensure they are protected by their corporation is education.
In corporate formality lawsuits, 43% of businesses sued for Breach of the Corporate Veil (a rapidly growing area of law), LOST, in many cases due to weak or non-existent paperwork. Had these businesses simply just known exactly what was required in their business, the proper paperwork and documentation could have been put in place removing all their risk.
There is no question about it. Most business owners are at risk in their own business because they are unaware of the corporate formalities they are required to follow. This is why Legal Book & Seal decided to put on a private 2 hour presentation for all my clients to ensure they have their business in order. I initially included the presentation as part of my $400 hourly retainer, but since I have found more and more businesses failing due to this issue, I wanted to make the material available to everyone, which is why you can access the ENTIRE presentation through our private training website for only $17.
I know giving away a $800 presentation for $17 sounds insane, but I feel it would be a disservice to not allow other well established businesses and startups that are currently at risk, to gain access.
Here are just a few of the things you will learn in the presentation and video course.
You will also gain access to the private Book & Seal Facebook group where you can ask questions and get feedback from the Legal Book & Seal Team, including myself, and other experienced individuals.
Get your copy now and be sure to watch over the first video immediately, where we review the top issues you need to ensure are done today, and get your personal assets protected before it’s too late.
Your Legal Advisor,
Michael J. Lightfoot
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Document Name: LB&S Breaking the Corporate Veil Article Draft V1.0
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