Business Law Blog

What is Piercing the Corporate Veil?

Posted by Amanda Butler Schley | Jan 15, 2025 | 0 Comments

Piercing the Corporate Veil is a legal concept where courts disregard the separation between a corporation (or LLC) and its owners (shareholders or members), making the owners personally liable for the business's debts and obligations. This typically happens in cases where the corporate entity is being misused or abused.  

Key Conditions for Piercing the Corporate Veil

Courts may decide to pierce the veil if the following factors are present:

  1. Failure to Maintain Corporate Formalities:

    • The business does not adhere to basic corporate requirements, such as holding meetings, maintaining separate bank accounts, or keeping proper records.
  2. Commingling of Funds:

    • The owners mix personal and business finances, making it unclear where the company's assets end and personal assets begin.
  3. Undercapitalization:

    • The business is underfunded to the point where it cannot meet its obligations, suggesting it was not set up to operate as a viable entity.
  4. Fraud or Misrepresentation:

    • The entity is used to perpetrate fraud or engage in illegal activities, such as shielding owners from liabilities incurred through deceitful behavior.
  5. Inequitable or Unjust Behavior:

    • The corporation is used as a shell or alter ego to avoid legal responsibilities, and failing to pierce the veil would lead to an unjust outcome.

Example Scenario

Suppose a small business owner forms an LLC but uses the LLC's bank account to pay personal expenses like groceries and vacations. The business is also underfunded and unable to pay its creditors. If a creditor sues and proves that the LLC was merely an extension of the owner's personal affairs, the court may allow the creditor to access the owner's personal assets to settle the debts.


How to Prevent Piercing the Veil

To minimize the risk of personal liability, business owners should:

  • Follow Corporate Formalities: Keep detailed records, hold meetings, and issue proper documentation.
  • Maintain Financial Separation: Use separate bank accounts for business and personal transactions.
  • Adequately Fund the Business: Ensure the business has sufficient capital to operate.
  • Avoid Misrepresentation: Be honest and transparent in dealings with creditors and third parties.
  • Act in Good Faith: Treat the business as a separate entity and avoid using it for personal gain or deceit.

Understanding and respecting the legal boundaries of your corporation or LLC can help protect you from personal liability while fostering trust with clients, creditors, and stakeholders.

About the Author

Amanda Butler Schley

Ranked as a Top Rated Business and Commercial Attorney, I have more than a decade of experience representing boutique hotels, family-owned businesses, privately owned restaurants, breweries, artists, executives and entrepreneurs.

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