Piercing the Corporate Veil – How It’s Done and How to Avoid It

A limited liability business’ protection of its owners’ personal assets is not absolute. If there has been serious misconduct, a party may persuade a court to hold a corporation’s owner, shareholders, or directors personally liable for the corporation’s debts or illicit conduct. This process is called “piercing the corporate veil,” and may be applied to any business that provides limited liability to its owner or owners.

Courts pierce the corporate veil when a business stops functioning like a limited liability business. Business owners enjoy limited liability protection only because their business exists as an entity independent of them. A court can take away the business’s protection over their personal assets if they stop running the business in accordance with the legal requirements for maintaining limited liability status. Piercing the corporate veil is a legal check that prevents business owners from enjoying limited liability protection while still operating their business like it is a sole proprietorship or general partnership.

There are several steps you need to take to protect yourself and your business from a piercing the corporate veil lawsuit:
First, keep your personal assets entirely separate from your business assets. Have a separate checking account and credit card for your business, and never use them for your personal funds or purchases. A paper trail showing that you use your business’s assets to buy things for yourself can be fatal in a piercing the corporate veil lawsuit.

Second, follow all legal formalities required for your type of business. The formalities will vary depending on what type of business you are operating (LLC, corporation, etc.). You will need to keep detailed records of all business actions, tax documents, financial transactions, legal and administrative filings, and many other things. Be careful and meticulous about this. Your failure to keep proper records could be used against you in court as evidence that you are not operating your limited liability business properly.

Third and finally, make sure your business is properly funded and publicly observable. You must adequately fund your business either through your own money or through a loan. A court will not see your business as legitimate if you are not funding it like a functional, independent entity. Also, be sure to use your business’s name for all transactions, contracts, advertising, and leases associated with the business. If you do not make your business easily identifiable to your customers, creditors, and the public, a court will be skeptical about whether your business is functioning in such a way that it deserves to maintain its special legal protections.

Business owners and investors can suffer serious financial consequences if their business’s corporate veil is pierced. Approximately half of all piercing the veil court cases succeed due to oversight and a lack of care on the part of business owners in protecting themselves from this kind of lawsuit. An attorney can help you make sure you are doing all you can to protect your business’s limited liability status.

Do you have more questions about piercing the corporate veil and how to protect yourself from it? The Indiana business law attorneys of McNeelyLaw are available to consult with you to make sure you are following all of the necessary steps to maintain your business’s limited liability status. Contact us at 317-825-5110 to speak with an attorney today.

This McNeelyLaw LLP publication should not be construed as legal advice or legal opinion of any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer on any specific legal questions you may have concerning your situation.