Blog | Entrepreneurship

The Importance of a Corporate Veil

How to protect your personal assets from creditor attacks

Do you remember the children’s story, The Three Little Pigs? It’s a fable about three pigs who build three houses of different materials. A Big Bad Wolf blows down the first two pigs' houses, made of straw and sticks respectively, but is unable to destroy the third pig's house, made of bricks.

In the traditional version, the story begins with the title characters being sent out into the world by their mother, to “seek out their fortune”. The first little pig builds a house of straw, but a wolf blows it down and devours him. The second little pig builds a house of sticks, which the wolf also blows down, and the second little pig is also devoured. Each exchange between wolf and pig features ringing proverbial phrases, namely:

“Little pig, little pig, let me come in.”
“No, no, by the hair on my chinny chin chin.”
“Then I'll huff, and I'll puff, and I'll blow your house in.”

The third little pig builds a house of bricks. The wolf fails to blow down the house.

Well, building a business is sort of like choosing the right material to protect yourself from the big bad wolf. Choosing the right entity is a start to properly control your own entity, in fact it’s the foundation for growth and protection. Then you must follow the corporate formalities and tax laws. These are your building materials. You want to do it right using brick and not straw, and thus be protected. Your entity is your structure and the more solid the foundation and building materials are, the more protection and control you have.

What is a Corporate Veil

The corporate veil is like the security system for your business. It’s what’s going to protect your personal assets from creditor attacks. The strength of your corporate veil is determined by how well you follow the laws, regulations and requirements of your corporation.

Understand that the veil is not a wall, not a mirror, not a net. It’s a veil—a sheer division where you can see the effect of what is happening, but you can’t actually touch it, and it can’t touch you. Unless it’s pierced.

What is Piercing the Corporate Veil

One of the reasons to incorporate is create that veil so that you are not liable for the actions of the business—the debts, the mistakes, and the liabilities of the corporation. The minute the corporate veil is breached, you are personally at risk.

When a corporate veil is pierced, the entity’s veil of limited liability is lifted and your personal assets are exposed to creditor’s claims.

How to Keep Your Veil Intact

If you set up your corporate entity properly, it will be a seperate, compartmentalized entity, with limits and boundaries. Below are key areas to help you keep your veil intact:

1. Taxes: Keep abreast of the taxes and obligations facing your entity
2. Choice of entity: a sole proprietorship and general partnership provide little to no protection
3. Follow corporate formalities: By following these rules you can avoid being held personally responsible
4. Insurance: Do a risk assessment review to make sure your business (and personal) needs are being met
5. Attorneys: A good attorney can be a lifesaver but can also help you follow corporate formalities by forming the company and filing required paperwork

There are a half dozen other key areas you’ll need to look at to ensure your corporate veil stays in tact. This is where having the right team surrounding you through your journey of entrepreneurship will come in handy.

Be sure to appreciate and preserve your corporate veil. Holding meetings, making all your filings on time and following the other formalities will make a huge difference. As Robert Kiyosaki says, “Basic asset protection isn’t enough anymore.” In these times, you must also constantly maintain to completely protect. You need a good entity defense, that well maintained corporate veil, to survive the offence attacks of litigants and their attorneys.

To learn more about how to legally operate and properly maintain your company, read Run Your Own Corporation.