What is the corporate veil and what does it mean to pierce it

In our previous article, we talked about asset protection. We mentioned the corporate veil.

A brief history of corporations

Historically there were no corporations. Corporations have their origin in Holland. At the time there were ship expeditions that would carry goods back and forth between India and Europe.

Clearly, you would have people who finance those expeditions. As you can imagine many things could go wrong: ships could crash somewhere, they could sink, all the goods lost, as well as numerous lives.

There was little to no protection for the investors of such trips. If things go bad they would be personally liable for the loss. The other side wouldn’t get goods, and they wouldn’t get their money.

In order to protect themselves, they introduced this legislation that crated corporations.

This made a rule that the liability of shareholders was limited to the number of assets that they put into the company.

The money that they didn’t put in there wasn’t exposed if things go bad and if there are tons of extra unpredicted costs.

In other words, this protected the investors’ personal assets, that they didn’t put into the ship expedition.

This was the birth of corporations that we still use to this day.

What does it mean today?

Let’s imagine that you have a company, and there is some sort of dispute with your employees. Or there are some issues where the company doesn’t make enough profit, and it goes bankrupt. Creditors are coming and they want to seize assets.

Well, there is a veil of protection between the company and the owner.

The company doesn’t equal its shareholders in this case, it’s an entity for itself.

Shareholders can be both individuals and other companies.

This is very important in asset protection– we usually form two types of companies. The operating company and the holding company.

Operating companies are the ones taking on the risk, and most of the assets are transferred to the holding company.

If something goes wrong the operating company can go bankrupt and it will not affect the assets, because they are being held somewhere else, in our holding company.

Piercing the corporate veil

In theory, it all sounds nice and smooth, right?

However, there is something called ‘’piercing the corporate veil’’

This concept doesn’t exist in all countries, for example, Panama doesn’t recognize it.

However, this concept is very common in countries such as Canada, the US, UK, Australia, etc.

Potentially, this can be your worst nightmare.

How would they go after your assets in this case?

Well, they’d need to prove that there’s something called the altered ego. This means that they need to prove there aren’t really two different separate entities, but one company is the altered ego of the other.

If this proves to be the case in the court, creditors can potentially go after the assets in the holding company.

How to protect your assets?

Ideally, you want to really separate these companies into two different entities, and think of them as separate. Many people are transferring money back and forth between them, even using them for funding their personal expenses. This Is not a good thing to do.

In this case, it would be quite easy for creditors to prove that those are not two different entities.

You will certainly have to transfer some money between those companies, but it has to be done under certain terms.

If you are transferring the money, you need to be able to prove that this is in the best possible interest of the company. If everything is done in an appropriate manner: there was a board meeting approving this transaction for certain reasons, it is in the documents, the secretary noted it, etc. it will be very hard to pierce the corporate veil, and you might save the assets.

If your creditors have good lawyers, they can use all sorts of tricks to go after your assets. However, it will take time and energy.

This is a reason why it might be good to consider another jurisdiction. Certain jurisdictions are not very creditor friendly.

In some cases, they can pierce the veil at one level, but it can be close to impossible to pierce it at the next level.

Imagine that you have a US operating company and a holding company in Panama. You get sued, and they say that you are liable at the holding company level. Well, this has been achieved in the US, but now creditors have to prove the same thing in Panama.

Panama doesn’t have the same standards. The legal system is different, language is different, lawyers are different, clearly, things are much harder for someone who is trying to go after you.

For you, this means that all of a sudden you have much more solid protection!

If your holding company was in the US, they would simply take your assets. They can’t do the same in Panama.

In reality, they would be much less likely to even sue in Panama, because they’re less likely to win the case.

If you want help with asset protection, structuring or any sort of advice feel free to reach out to us.