Corporate Veil: Separate Entity Protects Owners From Liability - Essay Sample

Corporate Veil

Corporate Veil describes the separation of a firm from owners. A limited company is a separate entity which shield the owners from personal liability in case of negligence or any debts that the firm incurs. However, the court can pierce the corporate Veil by holding liable the shareholders or owners personally accountable for negligence or liability. There are certain circumstances under which the Veil can be pierced. First, a veil can be pierced by a court of law in case the corporation is found to have been engaging in fraudulent activities. Secondly, if the corporate shareholders willingly allow the piercing of Veil for the public good, then the court can pierce it.

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Corporate Veil and Personal Assets

Owners of both public and private limited companies create a business entity that is formal as a way of protecting their assets from any creditors of the business. There are various steps that the business may undertake to enhance the protection of the corporate Veil. By preserving the corporate Veil, it means there would be a clear separation between the company and their owners. One of the steps is to ensure there are separate bank accounts for personal finance and business finances. It is an excellent practice to have such statements because it lessens the probability of the funds being deposited or withdrawn in the wrong bank accounts, which would eventually result in unjustified transactions.

Another strategy is to avoid using the company funds to pay for personal expenses or using private funds to pay for the costs of the firm. In case the owner is entitled to the funds of the company, they have to be deposited in the personal account of the owner so that they can now pay for the personal expenses. On the other hand, if it becomes necessary for the owner to pay for the costs of the company, say loan or wages, the funds have to be transferred from the personal account to company account either as a loan or additional investments. The documentations indicating the nature of the transaction have to be provided in this case. The company expenses can only be paid from the company account once the money has been transferred from the personal statement.

It is advisable to make the company name famous through registration, use of business cards and have a formal name of the company. Any purchase and related issues have to be made using the name of the company. More so, any company's legal document must be using the name of the business. More so, the firm should avoid engaging in any fraudulent activities which would result in piercing the corporate Veil. Such events may include reckless borrowing, and dishonesty in the deals and transactions. Following the applicable formalities is another option that the firm may undertake to protect the corporate Veil and hence the separation of the firm from its owners. For example, in Indiana, the business entities are expected to submit annual returns to the government for verification and approval.

The Veil Doctrine in Company Law

Under company law, a corporation is termed as a separate person who is entitled to various duties and rights. The legal person can possess property, sign contracts and can sue or be sued in its capacity. The limited liability that the company offers to its owners is the primary motivator behind the formation of a company. However, courts, under certain circumstances, lift the Veil of incorporation due to some violations. Unless such a situation occurs, the company remains as a legal entity which is separate from the owners.

The Real Meaning of Corporation Under Company Law

The word corporate law and company law mean the same under the legal aspect. It refers to the formation and creating business regulations and policies that govern the way they should conduct their businesses. Once the company is incorporated, it then becomes a legal person separate and distinct from its shareholders and empowers to various duties, obligations and rights. It can, therefore, be sued in its name and capacity.

The most critical ingredient of the separate legal entity in any company is the limited liability. Its primary aim is to ensure investors against personal assets and lives. It means under this clause, and the investors can only lose the amount invested in a company in the form of shares but not private property in case of a loss to the company. The creditors having claims against the company can only focus on the company assets to satisfy such applications since they have no power to entrench on shareholders' private assets. The effect of the limited liability close is to cap the investors' risks even though their gaining potential remains limited as well. Therefore, the veil act as shielding effect for shareholders of the limited company against their wealth. This concept of limited liability was initially invested in the 17th century in England. Before this period, many people were scared to invest because they feared the loss of private property in case the company makes mistakes or becomes unable to clear the debts.

Asset Protection

Any business owner might find it essential to incorporate the company or business because of the protection of personal assets. The corporate Veil provides the ability to protect a company that is well maintained by personal liability. When corporate Veil is managed correctly, it shields the shareholders against disputes, lawsuits and company creditors. The claims can only apply to the assets on the business and not the personal assets. Personal assets like real estate, bank accounts and any other company are safeguarded against the claims of the investors by the corporate Veil.

Separation of Personal and Business Assets

The owner of a company is obliged to maintain separation between him and the company. Otherwise, the personal assets may end up becoming vulnerable to the creditors. The directors and the management of the company have a general fiduciary obligation of being loyal and transparent. They should maintain a high level of integrity in all their deals. The company owners and management should make decisions that serve the best interest of the company. If the owner violates their duties, they may become personally liable for the deeds of the company. Another requirement is the maintenance of adequate business capital. If the business is undercapitalized to the extent that it cannot pay for debts and expenses, then the owner might be held liable, which would risk the personal assets.

Observing Corporate Formalities

Every state has requirements for every limited liability companies situated in that particular country. However, most of the countries dictate that companies should file annual reports which allow the government to keep the updated data regarding the status of the company. In case of a delay in filing the returns, the company should pay the required fee in good time. The company is also subjected to other formalities like holding annual general meetings, adoption of bylaws and election of officers. The other requirement is the scheduling of the annual public meeting with shareholders. The minutes of such meetings are supposed to be kept. The ledger is indicating how the company issues shares and the worth of each stock should be held in the company records. The firm is also supposed to record any payment that they make or receive in the course of their transactions. The profit and loss statements, as well as the balance sheet for the company, are also part of critical documents that any company should keep if at all, the Veil would be maintained. The business loans and terms of repayments should as well be secured all through.

The Company Director

Any person who is occupying the role of the director can be called a company director under companies Act (C.A.) of 2006. Section 254 of companies act dictate that every company should have directors. Section 154 argues that one of the directors of the company must be a natural person. The directors fall under various categories which include executive and non-executive directors, shadow directors, managing directors, nominee directors, alternative directors, and De facto directors.

Directors Power Concerning the Incorporation of the Veil

A company cannot operate in its capacity even though it is termed as a legal entity. The directors and other officers have to take responsibility for running the company. The directors are entrusted with the power of making decisions for the company under articles of association. However, the decisions have to be made by the whole board of directors and not an individual director. The company risks are entrusted more by one or more managing director appointed by the company.

The Circumstance Under Which the Court My Intervene and Pierce the Veil

Sometimes the company's corporate personality may be used to commit improper or fraud acts. In such a scenario, the court is forced to intervene to lift the corporate Veil. However, the court evaluates some critical grounds to consider before engaging itself into such a significant approach.

Unfairness

Unfairness is one of the firm ground under which the court will pierce the Veil of the corporation. In such a situation, the court intervenes to create fairness and bring justice results to the shareholders. Unfairness emerges in various ways, such as in takeover bids, where the transfer of shares is unfair. The rule state that any contract that involves the issue of shares must be approved by not less than ten shareholders' failure to which it is considered unfair. Violation of the rule requires the transferee company to make a notice to all its dissenting shareholders at any time within two months. In the event, the transferee company must allow the dissenting shareholder to make an application to the court to restrain the acquisition of his shares. As a result, on the contrary, the court in a friendly situation may lift the Veil of incorporation.

Fraudulent Trading

The court will lift the veil of incorporation if the business of the company is carried in a corrupt manner with intentions to defraud its creditors. In other words, if it is noted that the practices and the purpose of the company's business are fraudulent, then the court intervenes. In such an occurrence, the court on application declares that persons conducting the market in the manner aforesaid held accountable for all debts and any other...