The Mistake of a Business Owner Regarding Piercing the Corporate Veil

Hypothetical:  Mary works in human resources, but on weekends, she makes fantastic floral arrangements for her friends’ weddings. When Mary unexpectedly gets laid off, she turns her hobby into a business. She sets up the business herself. She files Articles of Incorporation for Mary’s Wedding Flowers, Inc. with the Minnesota Secretary of State.  On the day Mary opens up her flower shop, she immediately is swamped with business. Mary feels good because now she is incorporated and her business is flourishing. She deposits the money that she receives into her personal checking account, and everything is great. Then Mary gets into a dispute with one of her wholesalers, and Mary gets sued by the wholesaler. In the lawsuit, one of the claims is to pierce the corporate veil. Mary is not concerned about the claim of piercing the corporate veil because she has the document from the Secretary of State showing that she is incorporated. What are Mary’s chances of winning against the claim to pierce the corporate veil (the “corporate veil” protects Mary’s personal assets from being seized to pay for a judgment against her business)? The answer is “not likely.” Mary’s business does not have a corporate veil due to her actions.

Mary has not followed corporate formalities, which is necessary to maintain a corporate veil. While filing the articles of incorporation is necessary, it is just the first step of many. After meeting with counsel, Mary learns the following steps that should have been taken to protect the corporate veil:

• After receiving her incorporation, Mary needed to obtain bylaws and have minutes signed off by the shareholder (herself) and board of directors (herself) to reflect her actions and authority to act for the corporation.
• Then, Mary needed to obtain an EIN for the corporation.
• Once Mary has the EIN number, then she can go to her local bank and open up a checking account for her business. All revenue that she receives from her business must be deposited into the business checking account, and all of her business (not personal) expenses are paid from her business checking account.
• Throughout the year, Mary has to keep corporate minutes of the decision that she makes and the authority by the shareholder (herself as she is the only owner) and as the director (as she is the only director of the corporation).

Is your business properly incorporated?  Are you unsure if your business is properly incorporated?  If you have not followed the proper steps, take the steps now to ensure that you have the protection of an “incorporation,” which is the corporate veil.

Spangler and de Stefano, PLLP assists business owners with incorporation and protecting their corporate veil.

The material contained herein is for informational purposes only, and is not intended to create or constitute an attorney-client relationship between Spangler and de Stefano, PLLP and the reader. The information contained herein is not offered as legal advice and should not be construed as legal advice.