Corporate Protection Through Corporate Veil Contracts

Corporations have an asset base, which represents the value of their corporate assets. These assets include goodwill and long-term investments. In comparison to the personal assets of a corporation, the corporate assets tend to be more liquid. That is, they are easily liquidated in times of distress. On the other hand, the personal assets of an individual are usually not easily liquidated unless there is a court action or a bankruptcy order against the corporation.

One of the ways that corporations resolve their problems is to sell their corporate assets. Once a corporation sells its stock, all of its liabilities become immediately receivable. As previously stated, the liability of a corporation is limited to its shareholders. Therefore, selling the corporation’s assets can result in cash flow improvements for the corporation, although stockholder approval is required for most stock sales.

One method of reducing corporate debt is to issue preferred stock. Preferred stock allows a corporation to issue more shares of equity than it actually owns, thereby reducing the total amount of debt that the company has. To be entitled to the capital stock dividend, holders must have purchased at least two-thirds of the total number of shares.

Another way that businesses reduce their liabilities is by transferring brand assets to another firm, called a franchisee. For example, some companies transfer their consumer credit card processing software to a third-party processor. Or, they may sell their property, buildings, equipment, and labor to a tenant firm. A few well-established franchises even transfer all of their corporate assets to a new company. Franchisee liabilities, however, will almost always exceed shareholder equity.

Some corporations use the “seller pay-in” method, in which the seller pays a fee to the purchaser for holding the seller’s stock. This type of transaction is referred to as an “outright sale.” Outright sales usually reduce the number of shares that the corporation owns and therefore, the liability. The remaining number of shareholder votes are used to determine if the transaction is successful.

One final way that businesses use corporate veil transactions to reduce their liabilities is by creating a corporation for the benefit of all of the shareholders. A corporation is a separate legal entity from its owners and consists of a board of directors. The corporate veil provides protection to all shareholders for the same reasons that the business assets to shield them from liability. The corporation’s board of directors can only be held personally liable for the corporation’s debts. The shareholders can also sue the corporation for fraud or breach of contract.

Although corporations are required to liquidate their corporate assets when they are unable to pay their debt, most businesses choose not to do so. This is because doing so will require the issuance of millions of dollars of share capital and most shareholders would rather retain their ownership interest in the company. In addition to issuing shares of stock, some companies may issue convertible preferred stock (conversion notes) and other securities that allow them to receive cash from the corporation without having to sell outstanding shares. The issuance of conversion notes and securities reduces the liability of the business owner.

If you are considering purchasing corporate assets, it is important that you understand how each method of asset purchase will affect your value proposition and what type of assets you need to protect yourself against liability. You should consult with a corporate law firm that specializes in corporate law to discuss your specific needs and the steps you must take to comply with the laws in your state. Remember that there are multiple routes to achieve success and there is no right answer that is right for every type of business. A strong brand identity is the cornerstone of any company’s success and purchasing corporate assets that offer a limited scope of performance can put you at a competitive disadvantage. Consult an attorney that can guide you through the process of choosing assets that will strengthen your business and provide you with the protection you need.