Piercing the Corporate Veil: Causes and Consequences

What does it mean to pierce the corporate veil and under what circumstances can it occur?

Piercing the corporate veil is a legal doctrine that allows a court to hold a business's individual owners, shareholders, or members personally liable for the company's debts or obligations. This occurs when the court disregards the separate legal existence of the corporation or LLC, effectively "piercing" the protective veil provided by the corporate structure.

Piercing the corporate veil typically occurs in situations where the owners have not maintained proper separation between their personal affairs and those of their business, or if the owners have engaged in misconduct. Circumstances in which a court may pierce the corporate veil can include:

1. Fraud or Misrepresentation: If the corporation or LLC has been used to perpetrate fraud or mislead creditors and third parties, the court may decide to pierce the corporate veil to hold the responsible parties personally liable for the resulting damages.

2. Insufficient Capitalization: If a business is deliberately undercapitalized to the point where it cannot meet its financial obligations, the court may pierce the corporate veil to protect the interests of creditors.

3. Commingling of Assets: If the owners of the business have failed to maintain separate bank accounts for their personal and business transactions or have used business assets for personal purposes, the court may conclude that the business is an alter ego of the owners and pierce the corporate veil.

4. Failure to Follow Corporate Formalities: When the owners of a corporation or LLC do not follow required corporate formalities, such as holding annual meetings, maintaining minutes of meetings, and keeping separate records, the court may decide that the business's separate legal existence should be disregarded.

5. Domination or Control: If a shareholder or member exercises excessive control or domination over the business, treating the business as their personal property rather than as a separate legal entity, the court may pierce the corporate veil.

6. Instrumentality or Agency: If a business is used as an instrumentality or agency for an individual or another business, and the individual or other business is exercising control and manipulation over the business to bypass obligations or promote an unfair result, the court may pierce the corporate veil.

It is essential for business owners to maintain proper separation between their personal and business affairs and to observe all required corporate formalities to mitigate the risk of having their corporate veil pierced. Consulting an experienced attorney can help ensure compliance with these requirements and reduce the likelihood of personal liability for business debts and obligations.