Piercing the Corporate Veil
Business owners and managers form a limited liability company (LLC) or corporation to not be held personally liable for debts the business isn’t able to pay. Still, at times, courts can hold an LLC or corporation’s owners personally liable for business debts. This is called “piercing the corporate veil.”
Since COVID-19 began, so many small business owners are trying to keep their companies afloat or are closing. If a corporation or LLC ends up having to shut its doors, the last thing a small business owner wants is to have to pay the business’s debts. When cash is tight, and owners aren’t careful if an unpaid creditor sues for payment a court might “pierce the corporate veil” (lift the corporation or LLC’s veil of limited liability) and hold the owners personally liable for their company’s business debts.
Results of Piercing the Corporate Veil
The advantage of establishing an LLC or corporation is that the owners and managers have limited personal liability for the business debts. This means that the people who own and run the corporation or LLC cannot usually be held personally responsible for the debts of the business.
Yet, in certain situations, courts can ignore the limited liability status of a corporation or LLC and hold its owners, personally liable for its debts. It’s called piercing the corporate veil. Creditors can go after the owners’ home, bank account, investments, and other assets to satisfy the corporate debt, If a court pierces a company’s corporate veil.
But courts will impose personal liability only on those individuals who are responsible for the corporation or LLC’s wrongful or fraudulent actions; they won’t hold innocent parties personally liable for company debts.
When Courts Get Involved
Courts might pierce the corporate veil and impose personal liability on officers, directors, shareholders, or members when ALL the following are true.
There is no real separation between the company and its owners.
Here are a few examples:
Some small business owners transfer money for their own personal use by writing a check from the business checking account to make a payment on their home mortgage or bills — or by depositing a check made payable to the business into the owner’s personal bank account.
To avoid the “commingling of assets,” the owner should never use the business checking account for personal use and vice versa.
Overlooks the legal formalities that a corporation or LLC must follow.
It’s important for small corporations and LLC’s to comply with the rules governing establishment and maintenance, including:
The company's actions were wrongful or fraudulent.
If the owner recklessly borrowed and lost money, made business deals knowing the business couldn’t pay the invoices.
To state an annual revenue to receive a higher credit or loan amount, then you can’t pay the bill, this could be found as financial fraud perpetrated and the limited liability protection wouldn’t apply.
The company's creditors have unpaid costs.
If someone who did business with the company is left with unpaid bills or an unpaid court judgment and the above factors are present, a court will try to correct this unfairness by piercing the veil.
An unpaid court judgement could have been a lawsuit against your company, but it was never paid. The creditor can then come after you if the following two statements above are true.