A limited liability company (LLC) shields owners, members, and stockholders from lawsuits filed against it. Sometimes an LLC may not pay its bills, become defunct, or go into bankruptcy. In these instances, creditors may be able to collect money by piercing the LLC’s corporate veil. 

What Does Piercing the Corporate Veil Mean?

Piercing the corporate veils refers to a court taking away the company’s LLC status. Once a company no longer has LLC status, creditors can go after owners for unpaid debts. 

How Do Courts Determine if A Company Has Pierced the Corporate Veil?

Before declaring an LLC a sham, a court will look at the following factors: 

  • Failure to maintain separation between the LLC and owner’s finances 
  • Wrongful Conduct
  • Inadequate Capitalization
  • Failure of Corporate Formalities 

Will I Have an Easier Time Convincing a Court to Take Away a Small Business’s LLC Status?

Yes. Often a small business either operates without following LLC corporate formalities or operating without correct funding. Corporate formalities are steps a company takes to ensure the LLC distinctly operates separately from its members. In general, businesses maintain a separate identity from its owners by holding regular meetings and keeping business financial records separate from members’ finances.

Is a Large Corporation Immune from Losing Its LLC Status?

No. Courts can pierce the corporate veil of a large corporation when owners or directors create subsidiary corporations. The subsidiary corporations are often used to transfer debts from the large corporation to the subsidiary. 

Do I Need the Help of an Attorney to Declare an LLC a Sham?

Yes, piercing the veil of a LLC or corporation takes a lot of legal expertise and knowledge. A business lawyer can help.