Starting A Small Business: Limiting Owner Liabilty Behind the Corporate Veil

August 20, 2012

One of the major reasons companies choose to form a legal entity (such as an LLC or corporation) is to limit personal liability of the shareholders or members.  Simply put, the personal assets of the company’s owner(s) – including their homes, cars, savings, and personal property – are not at risk for actions taken by the company when the company is a limited liability legal entity.  This limited liability is typically referred to as the “corporate veil” because the owners of the company are protected behind it.  It is very important, though, for business owners to understand that there are situations where the corporate veil can be “pierced” to reach the personal assets of the business owners.

The Corporate Veil in Ohio and Michigan

In Ohio, the corporate veil may be pierced (and the owners can be held personally liable) if the following three things are all true:

  1. control over the corporation by those to be held liable is so complete that the corporation has no separate mind, will, or existence of its own
  2. control of the entity is used to commit fraud or wrong or other dishonest or unjust act; and
  3. injury or unjust loss resulted to the plaintiff from such control and wrong.[1]

In Michigan, the following three things must be proven to pierce the corporate veil:

  1. the corporate entity must be a mere instrumentality of another entity or individual,
  2. the corporate entity must be used to commit a fraud or wrong
  3. there must have been an unjust loss or injury to the plaintiff. [2]

How to Avoid Piercing the Corporate Veil

Taking these tests into consideration, here are some steps to take to avoid personal liability arising from your limited liability business:

  • open up a separate business banking account
  • obtain a federal tax ID number for your business
  • maintain corporate formalities
  • have an operating agreement drafted for your business
  • either have enough money in your bank account to cover expected liabilities for the business or take out an insurance policy to cover expected liabilities for the business
  • keep formal meeting minutes for your company
  • maintain corporate records
  • hold at least one meeting per year, even if you are a single member LLC
  • do not use include personal expenses in those of the business
  • do not comingle personal assets with those of the business
  • do not commit fraud