Piercing the Corporate Veil: 7 Habits That Quietly Destroy Your Protection

You formed an LLC or Corporation.

You think you’re protected. Your personal assets are safe. You’re covered.

But you’re not.

Common habits destroy your protection. They pierce the corporate veil. They expose your personal assets. You don’t even know you’re doing it.

This guide shows you the seven habits.

What they are. Why they’re dangerous. How to avoid them. How to maintain protection.

Read this. Fix the habits. Protect your assets.

What Is Piercing

Piercing the corporate veil means courts ignore your entity.

What it means:

• Courts treat you and your business as the same
• Your personal assets become vulnerable
• Limited liability protection disappears
• You’re personally liable for business debts

When it happens:

• You don’t maintain proper separation
• You treat business as personal extension
• You ignore corporate formalities
• Courts see no real distinction

The reality: Your entity only protects you if you treat it as separate. Mixing personal and business destroys protection.

Habit 1: Mixing Finances

The Habit:

• Using personal bank account for business
• Using business account for personal expenses
• Mixing funds without clear records
• No separation between personal and business money

Why It’s Dangerous:

• Courts see no distinction between you and business
• Looks like business is just your personal account
• No evidence of separate entity
• Easy to pierce the veil

How to Fix:

• Open separate business bank account
• Never use business funds for personal expenses
• Never use personal funds for business (except proper capital contributions)
• Keep clear records of all transactions

Pro tip: Separate bank accounts are non-negotiable. This is the easiest way to maintain protection. See our EIN guide for getting your EIN to open a business account.

Habit 2: No Formalities

The Habit:

• No annual meetings or minutes
• No corporate resolutions
• No documentation of decisions
• Operating like a sole proprietorship

Why It’s Dangerous:

• Shows you’re not treating entity as separate
• No evidence of corporate structure
• Courts see informal operation
• Easy to pierce the veil

How to Fix:

• Hold annual meetings (even if just you)
• Document major decisions in minutes
• Create resolutions for important actions
• Maintain proper corporate records

Pro tip: Even single-member LLCs should maintain basic formalities. Document major decisions. Keep corporate records. See our compliance guide for requirements.

Habit 3: Undercapitalization

The Habit:

• Not putting enough money into business
• Operating with minimal capital
• Relying on personal funds for business expenses
• Business can’t cover its own debts

Why It’s Dangerous:

• Courts see business as underfunded
• Looks like you’re avoiding business obligations
• No real separation if business can’t function independently
• Easy to pierce the veil

How to Fix:

• Capitalize business adequately
• Ensure business can cover its obligations
• Don’t rely on personal funds for business operations
• Maintain proper capital structure

Pro tip: Your business needs enough capital to operate independently. Don’t undercapitalize. Ensure it can cover its debts and obligations.

Habit 4: Personal Use

The Habit:

• Using business assets for personal use
• Treating business as personal piggy bank
• No clear distinction between personal and business assets
• Business exists only to benefit you personally

Why It’s Dangerous:

• Shows business is just your alter ego
• No real business purpose
• Courts see personal benefit as primary purpose
• Easy to pierce the veil

How to Fix:

• Use business assets only for business purposes
• Don’t treat business as personal extension
• Maintain clear business purpose
• Separate personal and business use

Pro tip: Your business must have a real business purpose. Don’t use it as a personal piggy bank. Maintain clear separation.

Habit 5: Poor Documentation

The Habit:

• No written contracts or agreements
• No documentation of transactions
• No records of business decisions
• Operating entirely informally

Why It’s Dangerous:

• No evidence of separate entity
• Looks like business doesn’t exist
• Courts see no formal structure
• Easy to pierce the veil

How to Fix:

• Document all business transactions
• Use written contracts and agreements
• Keep records of business decisions
• Maintain proper business documentation

Pro tip: Documentation proves your entity exists as separate. Keep records. Use written contracts. Document decisions.

Habit 6: Commingling Assets

The Habit:

• Mixing personal and business assets
• No clear ownership records
• Assets used interchangeably
• Can’t tell what belongs to whom

Why It’s Dangerous:

• Shows no real separation
• Courts can’t distinguish assets
• Looks like everything is personal
• Easy to pierce the veil

How to Fix:

• Keep personal and business assets separate
• Maintain clear ownership records
• Don’t mix assets
• Document asset ownership clearly

Pro tip: Keep assets separate. Maintain clear records. Don’t commingle. Separation is key to protection.

Habit 7: Ignoring Entity

The Habit:

• Signing contracts in personal name
• Not using entity name in business
• Operating without entity structure
• Treating entity as optional

Why It’s Dangerous:

• Shows you don’t respect entity structure
• No evidence of separate entity
• Courts see you ignoring entity
• Easy to pierce the veil

How to Fix:

• Always use entity name in business
• Sign contracts in entity name
• Operate through entity structure
• Treat entity as real and separate

Pro tip: Your entity only protects you if you use it. Always use entity name. Sign contracts properly. Operate through entity.

How to Avoid

Use this checklist to maintain protection:

Financial Separation

• Separate business bank account
• Never mix personal and business funds
• Clear records of all transactions
• Proper capital contributions documented

Corporate Formalities

• Annual meetings held and documented
• Major decisions documented in minutes
• Resolutions for important actions
• Corporate records maintained

Proper Capitalization

• Business adequately capitalized
• Can cover its own obligations
• Not relying on personal funds
• Proper capital structure maintained

Asset Separation

• Personal and business assets separate
• Clear ownership records
• No commingling of assets
• Business assets used only for business

Proper Documentation

• All transactions documented
• Written contracts and agreements
• Records of business decisions
• Proper business documentation maintained

Entity Usage

• Always use entity name in business
• Sign contracts in entity name
• Operate through entity structure
• Treat entity as real and separate

Pro tip: Use this checklist regularly. Review quarterly. Fix issues immediately. Protection requires ongoing maintenance.

Your Next Steps

Identify your habits. Fix them. Maintain protection.

This Week:

1. Review this guide
2. Identify which habits apply to you
3. Fix the most critical issues
4. Set up proper separation systems

This Month:

1. Fix all seven habits
2. Establish proper systems
3. Maintain ongoing compliance
4. Review protection regularly

Going Forward:

1. Maintain financial separation
2. Keep corporate formalities
3. Document everything
4. Review protection annually

Need help? Check out our liability risk guide for why protection matters, our compliance guide for ongoing requirements, and our liability shield guide for setting up protection.

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