Corporations are valued for a number of reasons and the shield against liability is certainly a big one. Given this, you really don’t want to inadvertently breach your corporate shield.

What is the corporate shield? It is the barrier that is put up between you and the business obligations of the corporation. So long as you run the corporation as a legitimate business and follow the basic corporate rules, any debt or obligation of the business cannot pass through directly to you on a personal level. Put another way, your home, savings, investments and so on are not at risk.

Are there ways to pierce this corporate shield? Of course there are. If you commit a criminal act via the corporate entity, you are not going to get any protection. For example, you see various corporate people going to jail for the Enron nightmare. You shouldn’t be committing crimes anyway, but certainly don’t do so thinking your corporate shell is going to shield you.

The alter ego doctrine is another theory used to pierce the corporate veil. As the name suggests, it will be argued that you are essentially using the corporate entity for your personal matters and the entity is thus a sham. Since it is a sham, it should not be allowed to act as a shield from liability.

There are a lot of factors that go into an alter ego determination. Generally, you will be fine if you do three things. One, don’t commingle your personal life, money, tasks, bills and so on with those of the entity. Two, follow the corporate formalities such as filing your annual statement of officers with the Secretary of State and hold an annual meeting. Three, don’t commit fraud through your entity. Don’t set up Ponzi schemes and the like! Follow these basic rules and you should be okay for the most part.

Finally, many corporations owned by a single shareholder are pierced when the do something entirely voluntary. If you “personally guarantee” an obligation of the corporate entity, you are on the hook for it. You cannot try to claim the corporate protection at some later point in time. This often happens with leases for office space and the like. The shareholder/president of the corporation signs off on it without giving a second thought. Avoid this!

How often do any of the above come up? Not often. If you run the entity as a business and follow the basic rules, you should be fine.

Richard A. Chapo writes about how to incorporate in California for SanDiegoBusinessLawFirm.com.