The Business Mentoring Center
The Business Mentoring Center

Mentor Article

Piercing the Corporate Veil

Stacey Edwards Jones

Many small business owners, including farmers, organize and operate their businesses through separate legal entities such as limited liability companies or corporations. Business owners incorporate for a variety of reasons including management, liability protection benefits and self-employment tax savings.

But business owners must exercise caution to demonstrate that they, as business owners, and the entity do not function as a single unit. The term “piercing the corporate veil” references a method of holding an individual responsible for the liabilities of a business entity despite the company being a separate corporate entity with limitations on its liability. To ensure maximum protection for personal assets, business owners must ensure their business entity is properly formed and maintained.  Business owners should consider the following in organizing their business operations:

Organization and Maintenance.  Business owners and farmers should organize their business by filing Articles of Organization or Incorporation with the Minnesota Secretary of State. Business owners must file an annual renewal each year with the Secretary of State to avoid administrative dissolution. Additionally, business owners should create and adopt an Operating Agreement or Bylaws that are specific to their business and that defines the rights, responsibilities, and obligations of managers, governors, shareholders or members.

Records and Formalities. Once the entity is formed, owners must follow the management procedures that they have established in their Operating Agreement or Bylaws.  The entity should maintain a corporate record book that is updated to include organizing documents and minutes documenting important business decisions.

Separate Financial Records and Accounts. The business entity should maintain separate bank accounts from the business owners and personal funds should not be intermingled with business funds.

The foregoing are steps that incorporated business owners can take to ensure maximum liability protection for their personal assets from the debts and obligations of the business.

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