Reverse Stuff

Forming a business entity, whether a corporation, limited liability company, or other entity, provides certain asset protection against legal claims (as well as giving a business some street cred because you can put “Inc.” or “LLC” behind your name).

My brother drills water wells for a living (and for the sheer thrill that finding underground water provides).  We formed a corporation about 7 years ago, so if Bill’s water-well drilling operation creates a legal liability (exempli gratia [e.g.] he mistakenly drills into a high-pressure natural gas main and blows Douglas County, Nebraska to Kingdom Come), only the assets within Allen Well Company, Inc. are subject to litigation and legal claims–assuming Allen Well Company, Inc. is a legitimate, separate entity from Bill the individual.  (Note well [NB]:  Assumptions, hunches, and gut feelings are not appropriate business practices.)

Let’s say Bill blows up Douglas County.  Harmed individuals would probably sue his company.  If their claims exceed his insurance coverage and the company’s assets, they might attempt a corporate veil piercing, a legal doctrine that allows claimants to pursue his personal assets–not just the company’s assets.  A court would consider many factors to determine whether those claimants could pierce the veil.  They include:

  • Did Bill maintain a corporate minute book?
  • Did Bill ever take his kids to the water park on the company credit card with no ordinary and necessary business purpose (IRS-speak) and report the expense on the company tax return?
  • Did Bill’s brother Dan seriously just hyperlink the Internal Revenue Code?  What a dork.  (This actually is not a factor.)
  • Did Bill’s corporation file separate tax returns from his and his wife’s individual Form 1040?
  • Did Bill’s corporation have its own bank account, and do bank records report adequate initial capitalization?
  • Blah, blah, blah.

OK, you get the picture.  Do not intermingle personal and business matters.  Surely, you can take dough out of the company to buy groceries or to take a vacation, but you should not report those as business expenses on the company tax return.  (Yeah, I typed “surely”, not “sure”.  Substitute “certain” and “certainly” and you’ll know whether to use “sure” or “surely”.  You’ll just sound snobbish.)  Now, let’s take this to another level.

TIMEOUT:  The following paragraphs are not “paragraphing”.  I don’t know why.  Deal with it.  TIMEIN.

A reverse corporate veil piercing also can occur.  Let’s say you own a corporation with $1.0 million USD in net worth (the company’s assets minus its liabilities), and the IRS says you didn’t correctly report personal taxes (differentiate the two).  The IRS could attempt to seize corporate assets through a reverse corporate veil piercing.  Get it? You have a personal liability, and the claimant goes after business assets.   I’ve seen it before, and it ain’t pretty.  But at least the lawyers have billable time …
I type all this to make another point.  Reversing stuff generates perspective.  Recently, I reversed the Golden Rule, which mandates treating others as we would treat ourselves.  So what about treating ourselves as we treat others?
I’m my own worst critic and exceptionally hard on myself.  Strangely, I would never say to others what I think about myself from time to time.  I am rude, condescending, and generally a real jerk to myself.  I’m working to change that.  If you lean that direction, consider how you treat others and treat yourself similarly.
Unless you’re already a jerk to others … then you’re just being consistent.  Congratulations.
Over and out on the psychobabble.

6 Comments on “Reverse Stuff”

  1. Debbie says:

    Geez, slow down a bit. This is information I need right now and I’ve read this several times and still don’t understand it!!! I’ll keep reading until I get it. Glad you like the blogging, you’re doing a great job and good material. Groupie DK1. Bite me Dick (DK2)

  2. The DA Blog says:

    If you pick this up in a few days, you’ll have it years before I did. I like your pre-emptive strike on anticipated DK criticism. Nice work …

  3. The DA Blog says:

    Oh, and thanks for the kind words. Glad you enjoy the project and nice to have another groupie. The first is my cousin Venna who resides in LaGrange, IL. You’d like her; she’s cool.

  4. Roger Sahs says:

    Could you repeat the above in Queen’s English pleaze??? LOL!

  5. […] That would likely occur if the person claiming injury by your business argued a Corporate Veil Piercing.  I previously posted about that legal doctrine.  Review here. […]

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