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How to Avoid Piercing the Corporate Veil

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Dateline: Belgrade, Serbia

As a lifelong entrepreneur, I want to talk to you today about a business concept that I’ve always followed very carefully.

If you’re starting a business, you need to ensure that you’re keeping your business and direct personal benefit or affairs as separate entities.

Failing to keep your corporate and personal assets separate ensures not piercing the corporate veil.  

Disclaimer: I’m not an attorney. We work with a lot of attorneys here at Nomad Capitalist, but this is not legal advice. When you’re incorporating offshore, you want to make sure that you contact an international tax expert and attorney. Too many people read one blog on the internet about a topic and think they are set. 

Don’t be that person.

This article is only meant to cover the basics to point you in the right direction so that you will get the professional help that you need for your business entities.

Growing up in the United States – where this concept of piercing the corporate veil is largely talked about – it was always clear that if you run your company as a sham or front to protect you from personal liability, you’re going to get in trouble. 

Beyond setting up the corporate structure itself, you have to be doing things correctly within that structure – including having a separate legal entity from your personal affairs – for it to truly offer any protection.

In this article, I will tell you why this is so important, especially for businesses going offshore. 

How to Avoid Piercing the Corporate Veil

A Company Is Not a Shield

Let’s step back for a second and discuss what this means. 

You want to go out and start a business. To protect yourself and add some level of organization, you set up an LLC or PTY Limited, whatever type of company you have where you live. 

Generally, if it’s just you or you and a buddy, you are the shareholders. You’re the owners. There’s not a complicated ownership structure. 

But how do you run it?

When talking to folks who are running domestic companies but want to move their business offshore, I’ll ask them how they are running their business. Sometimes they’ll tell me that they just take money from the ATM when they need it or they’ll write themselves a check. 

I’ll ask them how much liquidity they keep in their business. Sometimes they keep almost all their liquidity in the business – which isn’t a bad thing. Sometimes they raid the company and the company never has any money because they have the money. 

These types of situations leave too much grey area for my comfort. Make sure that you’re keeping your corporate entity separate from your personal finances. This is not only true in the US, there are similar concepts in countries like the UK, Germany, and others. 

Failure to Observe Corporate Formalities 

If you are operating a company merely to protect yourself from liability and your own personal affairs, then in a court action such as bankruptcy, solvency, or civil action, the plaintiff can ask the court to hold you personally liable and pierce the corporate veil, not treat you as a separate entity and go after your personal assets. 

And if you have not done enough to separate you, personally, from your business, they may be successful in arguing their case that you failed to follow corporate formalities.

We’ve seen court examples in the past when someone left one company where they had signed a non-compete agreement and then went to work for themself as a consultant, violating the non-compete agreement. 

Even though this individual did all this through a company, putting a company umbrella over you doesn’t mean you can violate past agreements. It doesn’t absolve you of your personal obligations or stop the courts from piercing the corporate veil. 

A company is not a shield against any kind of unethical or illegal activity. 

More commonly, we see people come to us who are treating the company as their own slush fund. 

From what I’ve heard from our lawyers, while courts are generally reticent to pierce the corporate veil, it can be done. This is especially true if you’re going to claim that your company is bankrupt after you looted the company, or if you’re taking all the money out of the company and not leaving it enough money to survive. 

If you do this, you could end up in a solvency proceeding or civil proceeding – people could go against you because you took all the money. It’s like a fraudulent conveyance.

The Corporate Veil

Here’s why it is important to avoid piercing the corporate veil in the offshore world. We’re generally taking people who are running companies in the US, Australia, Canada, etc. and migrating those companies overseas. In the least, we’re adding a layer of offshore incorporation to the existing structure. 

Keeping things clean in your business and separating it from your personal finances is extremely important offshore for a variety of reasons. Number one, you may have an audit overseas. If you have been taking random sums of money out of your business account or simply withdrawing the money from an ATM without putting a name to each transaction, your audit is not going to go well. 

In the United States, you may be able to use your LLC to take out money when you want and the tax returns won’t be that complicated. But if you move to another jurisdiction, they may require a higher level, more complex audit. 

They want to know where the money is going. You could say that you took a dividend, but depending on where you live and where your citizenship is, that may not jive well with your overall offshore tax plan. 

If you’re a US citizen and you take a dividend from most foreign companies, that’s going to complicate things at the very least or, at worst, subject you to a high withholding tax rate or high-income tax rate

If you are not careful with how you run your business, you aren’t going to save money on taxes by moving your business overseas.

When you take your business offshore, you need to double down on the idea of running your company separate from your own personal finances or risk opening yourself up to the threat of courts piercing the corporate veil and bypassing the protection of your legal structures.

When I’m helping folks, I ask them to tell me only about their personal finance. I only want to know where their personal bank accounts are. As they tell me, they’ll start to weave in stuff about their business. That’s not what I asked them. 

If you don’t treat your business and personal affairs as two separate things, why should anyone else?

Make sure that there is a separation. These two things must be separate. 

Separating Business and Personal Affairs

If you fail to separate your business and personal affairs, a plaintiff could successfully request a corporate veil piercing from the court and go after your personal assets.

You’re going to have a lot of grief going offshore if you treat your company like a piggy bank. You need to put yourself on a salary. Put yourself on a dividend schedule. Perhaps give yourself a bonus schedule. It all depends on where you’re living for tax reasons and where the company is incorporated

You want to have some consistent way of taking money out of the company. That will help with other things you might want to do offshore. If you wanted to apply for a residence permit in a country that requires you to show the last six months of income statements, random ATM withdrawals aren’t going to cut it. 

You want to show them that, on the first of every month, you take out ten thousand dollars. You need something that is very clean demonstrating that the company paid for your personal account. It’s clean for your overseas audit and it’s clean for the country where you live or have citizenship. 

It all makes sense.

Incorporating Your Company Offshore

When you go offshore, you need to have more discipline than people often have in their home countries because you now have multiple jurisdictions involved. 

For the most part, I do not recommend that you set up a company in a place where you live and have citizenship. You want to compartmentalize your life. Have your company incorporated in one place, live in another, and have citizenshipin a third.

This is going to give you the most bang for your buck. 

But this will also necessitate that you keep all three parts of the puzzle happy. An ATM withdrawal whenever you’re in the mood or whenever you need to buy your kid’s diapers isn’t going to make the puzzle pieces fit together. 

Consult the Global Team

Keep the company where the company is. You can take money out of the company via something like a monthly paycheck to your personal bank account to pay for whatever it is you personally want, but then let the company reinvest in itself. Let it self-sustain. That’s the beauty of incorporating offshore. If your tax rate is zero or 5%, then the company has a lot more money to reinvest. You don’t have to be moving money back and forth. 

This will keep things cleaner.

But, you really have to keep your business affairs and personal affairs separate if you want to enjoy the legal limited liability of a business structure and avoid piercing the corporate veil.

Again, this is not legal advice, but I’m telling you that this stuff is more important when you go offshore, from a legal perspective, from an audit perspective, and even from the perspective of proving income for immigration purposes.

You need to have all your ducks in a row so that, whatever you are doing in your business, you ensure that you are not piercing the corporate veil. 

If you need help incorporating your company offshore and creating a holistic offshore plan that will allow you to separate your business and personal affairs, contact our team here


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