This post is a guest post from Allan Branch, a one time freelancer who created LessAccounting for freelancers who need to keep track of money or send invoices.

What if someone could sue your company and then, since your company has no money, take your house or win a judgment that takes you fifteen years to pay? The Corporate Veil provides protection against this happening to you.

What is it?

The Corporate Veil is the legal shield that protects an individual from being personally liable for the actions of his/her company. This only applies to owners, partners, board members, not employees or share holders. In this country a person, or a company may sue any other person or company for anything, at any time. But there is only one reason to sue, and that is to be awarded money. So if a person or company doesn’t have any money, then there isn’t really anything to sue for.

Unless of course, if there is no corporate veil, then they can come after you personally. This could leave you financially ruined for the rest of your life.

How does it work?

There are six types of companies in the US: Sole Proprietor, Partnership, Limited Liability Corporation (LLC), Limited Liability Partnership (LLP), Corporation (C-Corp), and Corporation (S-Corp). Of this list, Sole Proprietor and Partnership DO NOT protect the owner/partner, the others do.

Does this apply to me?

Are you a freelancer? Do you own your own business? Have you done any work for which you received a 1099? Have you done any work for a friend that you were paid for, but aren’t going to report as income (yes, building a website for $2000 counts)? If you answered yes to any of these questions, then congratulations, you are a business.

That’s right, you are a business even without filing a fictitious name statement, buying a business license, creating a corporate entity, or paying taxes. Any individual who does work and is paid for this work is considered a Sole Proprietorship, if two or more people do work together and are paid for it are considered a Partnership.

Who’s rule is this? The IRS. And the courts. The point here is that if you are doing any kind of work for pay you must protect your self and your family by creating a corporate shield. Small businesses are more often targets for veil piercing, you never hear about someone trying to pierce Apple’s veil and take Steve Job’s house.

How you can protect yourself.

Protecting yourself and your partners is very easy. The first thing to do is to create some sort of corporate entity to shield yourself. Any of the other four company types listed above, offer the same liability protection. (Although they each offer different tax benefits, so consult an accountant before choosing.)

Now you are protected. You still have to be careful, you must do certain things or else your plaintiff (or the IRS) can “pierce the corporate veil” and take your house. You have to sign every document with your title alongside your name, E.G. Steven A Bristol, President, Less Everything. Inc. You have to use a separate bank account for the business. You must never mix your personal finances with your corporate finance, E.G. write a payroll check for yourself, don’t just use the ATM, and don’t buy your daughter’s Christmas gifts with the company American Express card. In short, you must act as though you and your business are separate entities. If you are in doubt about anything, ask your accountant.

You can read more about piercing the corporate veil at Wikipedia.