New Federal Requirement: Starting January 1, 2024, most business entities in the US will need to report Beneficial Ownership Information.

Corporate Veil Piercing: How To Avoid It

Protecting Your Assets

If you are a business owner, one of the most significant reasons to incorporate or form a limited liability company (“LLC”) is to protect your personal assets from a business creditor’s claims against your company. This ability of a properly-formed and maintained company to shield its owners from personal liability is sometimes referred to as the “corporate veil”. Under certain circumstances, however, business creditors may be able to successfully make a claim against a business owner’s personal assets or “pierce the corporate veil”.

When properly managed, corporate veil provides crucial personal liability protection against creditors, lawsuits, and other disputes. Typically, these claims can only be applied to business assets. An owner’s personal liability is restricted to your investment in the company. Personal assets, such as real estate, bank accounts or other investments, are safeguarded from business creditors. In other words, you only risk what you put into the business.

Most veil piercing circumstances occur because a business owner has either failed to abide by the legal requirements for operating a business or because the owner did not clearly separate his personal and business assets. Here are some guidelines for establishing your business and conducting it in a way that makes “piercing the corporate veil” less likely:

Separating Personal and Business Assets

If you are the owner of a corporation or an LLC, you are obligated to maintain a legal separation between yourself and your company. If you fail to do this, you risk creditors claiming that your company is merely your “alter ego” – a mere shell of your “self”. Your personal assets may then become vulnerable to business creditors. These are some of the steps to take in order to separate business and personal assets:

First, not only should you maintain separate bank accounts for your business and personal finances, but you should never use company funds to pay your own personal expenses. If it becomes absolutely necessary for you to provide personal funds to pay employees or other pressing business expenses, document the additional funds as either a loan or an additional investment into the company.

Second, directors, officers and controlling shareholders (or members and managers of an LLC) have a general fiduciary duty of loyalty and integrity that should govern all their corporate conduct. This means that as an owner of a company you should always be making decisions that are in the company’s best interest. An opposite behavior would be taking actions that benefit you personally to the detriment of the company you own. If an owner violates this duty either on purpose (in bad faith) or by not paying proper attention (negligently) he may be personally liable for any consequences of his actions on behalf of the company to a business creditor.

Third, it is important to maintain adequate business capital. If your business is deliberately undercapitalized (cannot afford to pay for its operational expenses), you may become financially responsible for legal claims against your company.

To guard against some of the mistakes listed above, companies can sometimes obtain “Errors and Omissions” insurance coverage that would insulate directors and officers from legal action caused by their conduct while representing the company.

Observing Corporate Formalities

Every state has certain requirements for corporations and limited liability companies. Filing an annual statement (or annual report) is one of these requirements that applies to both types of entities. An annual statement allows the state to keep correct data about your corporation or LLC. If you do not submit annual statements and pay the required fees on time, the company can be administratively terminated. If your company is dissolved, you will lose limited liability protection. While LLCs have fewer requirements, corporations are also subject to other formalities that include holding an organizational meeting to elect officers, adopt bylaws and issue stock.

A company should also schedule annual meetings of shareholders and should keep minutes of the annual meetings with the company records. Corporations should also keep a ledger that details all shares issued to shareholders, and how much each share is worth. The bylaws detail the manner in which the company will be operated and are one of the corporation’s most crucial documents.

Corporations should keep records of all payments made, payments received and all invoices and statements. You should also keep profit and loss statements and balance sheets every year. In addition, corporations should maintain documentation for business loans and the repayment terms.

Guidelines for Limited Liability Companies

LLCs have fewer formalities to worry about. But it is advisable for LLCs to observe many of the same safety measures to prevent business owners from being held personally liable. Practical guidelines include holding an initial organizational meeting, adopting an operating agreement, maintaining documentation of all business decisions, documenting finances and encouraging all of its members to have an annual meeting, minutes of which should be recorded and kept.

While a single act may not lead to piercing the veil, numerous mistakes could be costly, leading to a situation where an owner becomes personally liable for claims against the business. Different states’ laws provide different levels of protection to business owners. States like DelawareNevada and Wyoming are very protective of the limited liability, making it very difficult for claimants to pierce the corporate veil and reach personal assets of the owners. Other states are much less hesitant to transfer the liability of the business onto its owners. This, along with favorable state tax rates, is what makes Delaware, Nevada and Wyoming so incredibly popular when it comes to forming companies.

Remember, when you form an LLC or a corporation, liability protection is one of your most important goals — observe the simple guidelines listed above so you do not lose this valuable feature of your company.

Protect your personal assets – Incorporate or Form an LLC today!

What Is Limited Liability and Why It Is Important?

What is Limited Liability?

The best way to explain limited liability is this – you risk what you put in. In other words, limited liability is a way to make sure that a person who is engaging in business does not risk his or her personal possessions in case the business fails. Any investor, partner, or member of the company that by law has limited liability cannot be made responsible for any unfulfilled company obligations and debts that are more than the amount that the person has invested.

Jack and Jill

Here is a simple comparison. Jack and Jill are friends. Jack is a handy guy and Jill is a great cook. To earn money from their talents, both start their own business. Jack earns his living by doing renovations. He bought his own equipment and simply advertises his services under his own name. Jack is a sole proprietor.

Jill decided to open a bakeshop. Before going into business, however, Jill has formed a small corporation (an S-Corporation), called Jill’s Cakes, Inc. Jill invested her savings into Jill’s Cakes, Inc. as a starting capital and then bought her baking equipment and leased her shop on behalf of her corporation. So long as things go well for Jack and Jill there are almost no differences between the two ways of doing business.

As soon as things turn sour though, the differences become apparent. One day, Jack mopped the floor right before leaving the apartment he just painted, but forgot to put up a sign. The owner walked in, slid on the wet floor and broke an ankle. He is suing Jack for medical expenses and lost wages. Jill accidentally dropped a peanut in a wrong batch of batter and caused a severe allergy attack in one of her customer. That customer is suing her for medical bills and pain and suffering.

What is at risk for Jack and Jill? Jack is risking everything he owns – his work equipment, his truck, his house, his personal belongings. So long as there is a judgment against him, Jack must sell anything he owns to pay it. Jill is risking only her business assets – her cooking equipment, her cash reserves, and anything else owned by Jill’s Cakes, Inc. But her personal things, such as her car and her apartment, are safe. Her business may become bankrupt, but her life will not be (completely) destroyed.

Of course, this story describes a worst case scenario. Many businesses prosper without many troubles. But many also fail, and it is so easy for a business owner to take advantage of limited liability that everyone should do it.

Maintaining Limited Liability

Several types of business entities offer their owners the protection of limited liability. The most popular are corporation and limited liability company (LLC). Each of these entities has its own advantages and drawbacks, but both offer their owners limited liability protection.

A few things are important to remember in the context of limited liability. First, a company must be properly maintained in order to offer full liability protection that it is designed to offer. In short, if a company is only a company in name, but is run as if it is one and the same with the person running it, the courts will consider it a sham, and will not afford the owners limited liability protection. You can read more on this topic in our article on Piercing the Corporate Veil.

Second, even in a limited liability business an owner may be responsible for amounts beyond his or her investment. This is the case when an owner has personally co-signed a debt agreement (such as a credit card application). This signature gives the lenders a personal guarantee of repayment of that debt and in the case of default they can go after the owner’s personal assets. Other owners of the company (or investors) would not be liable if complete repayment is beyond the resources of the business, but the owner who had done the co-signing would be responsible for that amount.

Can anyone operate a limited liability business?

No, in some professions it is impossible to reap the benefit of limited liability. Professionals like lawyers, doctors, accountants, chiropractors, engineers, or architects are prevented by law and ethics from limiting their liability. We want these professionals to be personally responsible for their decisions so that they always make the decisions carefully.

The bottom line is, anyone doing business should consider taking advantage of a limited liability entity, if at all possible. Consider it an insurance against your worst case scenario.

Basic Formalities For Your New Corporation

What Is Covered Here

Let’s start from a little disclaimer: corporate formalities can be and in many cases are a rather complex topic. This article attempts to capture the most basic scenarios which are also the most common ones. That being said, we always recommend to consult a corporate/business attorney, licensed to practice law in the state of your corporation’s registration, who will be in a best position to offer advice on specific formalities that might be required for corporations registered in that state.

Examples of the more complex cases requiring corporate attorney attention are mentioned in the end of this article. Also, this article deals with for-profit corporations only.

And now lets proceed to the basics.

Corporate Formalities vs. LLC Formalities

One of the advantages of the LLC over corporation has to do with LLC structure and company formalities, both being less complex than corporate structure and formalities. As such, many states do not even require LLCs to have Operating Agreements, though it is a good practice to always have one in place. Corporations on the other hand are required to have Bylaws and Minutes of Initial Meetings in almost all states.

Basics of Corporate Structure & Corporate Roles

Corporation is an entity separate from its owners, and has a three-level structure: it is owned by shareholders, managed by board of directors, and it’s day to day operations are run by officers.

Below you can see the roles involved, as well as the steps that are typically taken in order to properly establish a standard corporation. The steps don’t have to be in that order – there is typically a degree of freedom in terms of what is done first.


A person or a group or persons who decide to form a corporation (typically future owners of the corporation) appoint someone – a person or an organization – to act as the Incorporator of their new corporation. For example, our in-house incorporators representing our company act as Incorporators on most corporations that our company forms on behalf of our clients.

The role of an Incorporator officially ends when the corporation is registered with the state, and the Incorporator issues a Letter of Resignation, naming the initial Directors of the corporation.

Board of Directors

A board of directors is a body of elected members (Directors) who jointly oversee the activities of a corporation. Board of Directors is elected by the vote of Shareholders (though initial board is appointed by the resigning Incorporator), and part of the responsibilities of the board is to appoint corporate officers and issue shares of stock.

Initial Board of directors is listed in the Letter of Resignation of the Incorporator, and this initial board is responsible to adopt the governing document of the corporation – the corporate Bylaws – as well as make first decisions involving initial issue of stock and sale of this stock to shareholders, as well as appointing corporate officers. For that purpose the First Meeting of Board of Directors takes place and its summary is recorded in the document called “Minutes of the First Meeting of Board of Directors”.


Shareholders are owners of the corporation, who typically contribute money or other tangible or intangible value to the corporation in exchange for corporate shares of stock.

Shareholders can be individuals or organizations, such as other corporations, LLCs, trusts, etc. To become a shareholder one needs to purchase shares of the corporation either from a new issue of stock (which is authorized by the Board of Directors), or through purchase of existing shares from other shareholders.

The first issue of stock takes place during the initial meeting of the Board of Directors. Directors agree on the size of the issue (number of shares) and price per share. Each shareholder is then given a Bill of Sale in exchange for the monetary or other value, and their shares are added to the Stock Ledger.

After the first issue of stock, new shareholders hold the Initial Meeting of Shareholders, during which they elect a new Board of Directors (or confirm existing one), as well as approve the list of Officers appointed by the Board. The summary of this meeting is recorded in a document called “Minutes of the First Shareholder Meeting”.


Corporation’s day-to-day operations are run by corporate officers. The titles and roles of Officers are often defined in the corporate bylaws, and typically each corporation has at least a President, Vice President, Secretary and Treasurer, or the equivalent roles, such as CEO (Chief Executive Officer), CFO (Chief Financial Officer), etc.

In most states the same person can be a shareholder, a director, and fill all officer roles. Some states have more strict requirements, for example some require that the President and the Secretary be different persons.

Articles of Incorporation and Shares

Articles of Incorporation are filed with the state of registration by the Incorporator. Articles include basic information required by the state statutes that provide certain information on the corporation: its name, the name (and, in many cases, address) of the Registered Agent, name of the Incorporator and more. Some states require listing business and/or mailing addresses, names and addresses of corporations initial directors or officers, etc. Articles are executed (signed and dated) by the Incorporator prior to filing with the state.

An important piece of information typically appearing on the Articles of Incorporation is related to shares. Many people get confused here, since the Articles require listing the number of Authorized Shares, and in some states also a parameter called “Par Value“.

Let’s try to clear out what each of those terms mean, and how they compare with other important terms – Issued Shares and Issued Price:

Authorized Shares

This number of shares is listed on the Articles of Incorporation only, and this is a theoretical number – its real meaning is this: the Board of Directors is not allowed to ISSUE more shares that it is AUTHORIZED on the Articles. So in case more shares need to be issued than there are Authorized on the Articles, the Articles need to be amended first to reflect a bigger authorized number.

Par Value

This dollar value is another theoretical number – it indicates the minimum amount in US$ that the Board of Directors is authorized to charge the new shareholders for the newly ISSUED shares. Again, if the Board wants to issue shares at cheaper value than Par Value the Articles need to be amended first.

When you choose to authorize stock with “NO PAR VALUE” this means the stock has no fixed minimum price. The directors can determine a price for the stock whenever they decide to sell it, which allows for maximum flexibility.

Issued Shares

Those are the real shares issued by the Board of Directors and sold to the shareholders at ISSUED PRICE. This is done after Articles where filed and the initial issue of shares is done during Initial Meeting of Board of Directors (if you order our Bylaws & Minutes service we will document this part for you at that time).

Issued Price

This is the actual price shareholders are paying for the issued shares.

Lets look at this example: a corporation XYZ, Inc. was incorporated with 1,000,000 Authorized shares and $0.001 Par Value. Board of Directors has issued 500,000 shares at $0.01 per share during the initial meeting. Those numbers fall well within the authorized number of shares and above the par value, so this issue is correct, leaving 500,000 more future shares to be issued.

However, during the second meeting, directors were required to issue 1,000,000 more shares at $0.00001 issue price per share, which they were not authorized to do per Articles of Incorporation. To solve this problem the Board has authorized an amendment of Articles with the state changing the number of Authorized shares to 10,000,000 and changing par value to No PAR VALUE. After this amendment the Board was able to issue the necessary additional shares at the desired issue price.

Role of Bylaws

Corporate Bylaws is a legal document that defines a corporation’s purpose, how it will run its affairs, and the duties and responsibilities of people who own and manage it. When you incorporate, you define some of these concepts in your Articles of Incorporation, but Bylaws take it to the next level.

The content of corporate bylaws varies, but typically includes the time and place for meetings of officers, set up of the board of directors, officers and committees, and any other provisions deemed necessary. Because the Board of Directors is the primary governing body of the corporation, this section would cover its composition and the number of directors. It would also discuss the length of a director’s term and how vacancies are to be filled. There would be job descriptions for the officers (i.e., President, Vice President, Secretary, Treasurer, etc.). The same goes for any committees – there would be clear direction about the composition of committees and their role in the corporation.

In addition to that the bylaws would discuss meetings of directors and shareholders, and define whether these meetings will be annual, quarterly or at some other pre-set time. The bylaws must also lay out the time and place of the meetings, attendance requirements and how many board members are needed for a quorum (the number of directors needed to vote on a decision).

What bylaws typically do NOT cover is the personal information on the actual individual shareholders, directors or officers, number of shares issued, or any other information of that kind. Such information would be listed in the Minutes of Meetings, Stock Ledger and Bills of Sale.

Meetings & Minutes of Meetings

Meetings of board of directors and meetings of shareholders constitute an important part of corporate formalities. The corporate bylaws define how frequently periodic meetings should take place, as well as the rules of special meetings, in case the matter at hand requires one.

The summary of each meeting is recorded in the Minutes of a Meeting by the corporate secretary. Those Minutes should be filed in the corporate records, and copies distributed to all participants.

Most notable are the initial meetings that take place during the formation of the corporation. During the initial meeting, board of directors adopts the corporate documents such as bylaws and articles of incorporation, as well as corporate seal, issue the first shares of stock and sell them to the initial shareholders, and finally elect the officers of the corporation. During the consequent initial meeting, shareholders elect a new permanent board of directors and confirm the appointment of the officers.

Other Formal Documents

Letter of Resignation of Incorporator

This letter is issued by the Incorporator and it lists the names of initial directors of the corporation, as well as statement by the Incorporator that all formalities of registering the corporation with the state of registration are completed and Incorporator resigns from his or her position.

Bill Of Sale

Bill of Sale is a document issued by the Board of Directors authorizing the sale of the corporate shares. Bills of Sale are issued to all shareholders buying shares of stock during a new stock issue. This is different from any purchase agreement negotiated between shareholders who sell existing shares.

Stock Ledger

Any new issue of shares, transfer of shares from one shareholder to another, or any other event involving creation, destruction or movement of shares of stock is recorded in the Stock Ledger. It is important to maintain a properly updated Stock Ledger in the corporate records as another evidence of stock ownership in the corporation (besides minutes and bills of sale).

Corporate Resolutions

A corporate resolution is a corporate action, typically in the form of a legal document, that is voted on at a meeting of the board of directors. The resolution could be on just about any subject, but one common subject is to define which individuals are authorized to act on behalf of a corporation to open accounts with financial institutions such as banks. This form of corporate resolution is also required by title agencies when selling corporate owned real estate. The form and structure of this document could vary depending on the state in which the corporation is organized.

Certificate of Incumbency

A Certificate of Incumbency is a document confirming the identity of the signing officers of a corporation. Sometimes it also confirms the names of directors and shareholders as well as minute book contents. A certificate of incumbency is often used to prove that a particular individual is authorized to enter into legally binding transactions on behalf of a company. A Certificate of Incumbency is also known as an Incumbency Certificate, a Certificate of Officers, an Officer Certificate, a Register of Directors, and as a Secretary Certificate.

Making Basic Changes In Your Corporate Structure

If you are looking to make changes in your corporate structure that involve issuing new shares, changing directors or officers, or transferring shares from one shareholder to another, you don’t need to amend the bylaws. Those changes are typically done by calling for a meeting (shareholder meeting when making changes to the board of directors, or directors meeting when issuing new shares or appointing new officers). Such meeting is then recorded in the minutes of meeting and those changes become official. Transfer of shares is typically done via a purchase contract, but such changes often also require approval of the board.

It is important to ensure that all meetings are properly organized, executed and recorded, based on the rules written in the corporate bylaws, just as it is important to ensure that bylaws are kept current and corresponding to the latest laws of the state of incorporation. We always recommend retaining a corporate attorney who can ensure that your corporate bylaws are current (if not, devise proper amendment procedures), and that meetings are performed and recorded correctly.

More Advanced Topics

We covered the most basic and standard topics dealing with corporate formalities, but it is fair to say that we’ve just scratched the surface. Corporate law had centuries to develop, and many states have their own peculiarities, known only to the attorneys practicing corporate law in that state.

Other complexities include the difference between types of stock, as well as other forms of securities. For example, a corporation can issue common stock and preferred stock, as well as create option plans, etc. All those are beyond the scope of this article, and we would recommend you to do a deeper research online, and certainly hire an attorney if you require a more complex structuring of your corporation.

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