For business owners, forming a corporation helps protect you from personal liability. A key way to preserve that protection is to avoid conduct that could support a “piercing the corporate veil” claim. This can make you personally responsible for the company’s debts, contracts and other obligations.
In Texas, courts generally look for elements of actual fraud and an alter ego relationship to prove that you are piercing the corporate veil. Taking steps to demonstrate that you operate a separate business legally and ethically can help protect you from these allegations.
Following corporate formalities
All companies, regardless of size, should follow structured governance and maintain operational formality. This includes the following:
- Documenting major decisions
- Keeping shareholder and director meeting record
- Filing annual reports with the state
- Updating operating agreements
Staying organized does more than ensure that you are not breaking the law, it helps maintain your company’s good standing as a separate entity.
Maintaining separate finances
Using company money for personal purchases can raise concerns and lead to fraud claims. Keeping your personal money and property separate from your business can protect you from these risks. Using a dedicated bank account and credit card for company costs also makes your spending easier to track.
Funding your business adequately
In addition to keeping separate accounts, making sure your business has enough capital to operate helps show it exists apart from you. Having enough funding also shows your company can pay its bills. Underfunding your organization can be a warning sign that it cannot stand on its own.
Keeping updated documents
Accurate documentation demonstrates that your company operates as a separate legal entity by creating a link from all operations to your business. Presenting clear and current business transactions, contracts and corporate decisions can support your claim of the legal distinction between yourself and your business.
Preserving your company’s integrity
Mitigating risks can help you protect yourself and your company from piercing the corporate veil allegations. Seeking legal guidance can help you further demonstrate that your company is being operated properly. Being proactive about this can allow you to focus on growing your business with peace of mind.