A limited liability company, or LLC, is a business combined with the tax freedom of a partnership, but with some corporate benefits. One advantage of the LLC is its members are not responsible for any of the company’s debts. When an LLC is sued or goes into bankruptcy, its members may be responsible for its debts.
Piercing the corporate veil is a court declaration that the company’s LLC status is a sham. When a court makes this declaration, the LLC status is lost and creditors are permitted to go after the owners’ personal assets. Owners of corporations are also personally liable for business debts under this doctrine.
Why Would a Company’s LLC Status Be Taken Away?
The company's corporate veil is lost when the court determines there’s no real separation between personal financial obligations and the corporation’s financial obligations. For example, an owner may use personal money to keep a company financially afloat, but doing so subjects the owner to personal financial liability.
When Will The Courts “Pierce” The Corporate Veil?
Courts may impose personal liability on its owners, members, or stockholders when:
- No separation exists between the owners and the company
- The owner or owners recklessly made business deals. This includes borrowing and losing money, acting dishonestly, or defrauding businesses
- The Corporation or business is undercapitalized
- If the corporation or business failed to follow its own formalities and rules
- Creditors are left with an unpaid judgment or bills
Do I Need to Talk to a Lawyer if I am Accused of Piercing the Corporate Veil?
Yes. This is a very serious accusation with financial consequences. Talk to a business lawyer immediately.