Piercing the Protective Veil

ParkmanLawFirm
August 27, 2013

One of the primary reasons our Birmingham attorneys in the probate division of Parkman & White, LLC are contacted is to create a legal business entity to protect the owner from personal liability. There are many entities our Birmingham probate attorneys utilize to meet these needs, including corporations, limited liability companies (LLC’s), limited liability partnerships (LLP’s), and professional corporations (PC’s).

However, creating the legal entity itself is not enough to protect the owners. Once the entity is created, the owners must follow proper corporate governance, or they may still be subjected to personal liability for corporate actions. Clever plaintiff’s attorneys are not dissuaded from suing a corporation, LLC, LLP, or PC just because the entity itself may not have many assets. The plaintiff attorney will look further to the owners of the company itself, to see if there are any assets to pursue.

Alabama law, in certain situations, allows a litigant to seek a judgment against an properly formed business entity, and in the absence of corporate assets, attach personal liability to that company’s owner. This is often called “piercing the veil.”

Every case is different, but our Birmingham probate attorneys advise all of our clients starting a new business by creating a new corporate entity to keep their personal finances completely separate from the company’s finances. The most common mistake is for a wholly owned business becoming the personal bank account of its owner. For instance, if you use your corporate bank account to pay personal bills, you are opening yourself up to personal liability in the event your business is sued. Likewise, if you fail to follow the corporate governance that is established when you created your new business, plaintiff’s lawyers may try to argue the company is merely your alter ego.

If you are a new business owner in Alabama, make sure to consult an experienced business and probate attorney to advise you on the best business structure for your new enterprise. However, most importantly, once you choose your business form, make sure to run your business in a way to completely separates your personal business from the company. If you decide to take money out of the business, make sure that you prepare the proper documentation for this distribution. Also, make sure you write a corporate check to you personally so you can deposit it into your personal bank account, never to your personal debtors.

It does not make sense for you to go through the trouble of limiting your personal liability by spending the money and time to properly create a business entity and then fail to protect yourself by not running the business separately. If you have any questions about limiting your personal liability in your new business, contact our Birmingham attorneys at Parkman & White, LLC for an evaluation of your business needs.