What is Piercing the Corporate Veil? And Why Should You Care?

By Danny Little
Attorney, Noland, Hamerly, Etienne & Hoss

One of the benefits of a corporation (or a limited liability company) is that conducting business under the corporate form limits your personal liability for business debts.  In other words, if a court orders your corporation to pay a creditor $50,000, that creditor can't access personal assets, such as your house, to satisfy that order, even if your corporation can’t satisfy that debt itself.

However, in certain circumstances, the limited liability protection offered by a corporation may be disregarded by a court -- this is called “piercing the corporate veil.”  If the owners of a corporation abuse the corporate form, the corporate veil may be pierced, and the individual’s assets may be at risk. The purpose of this doctrine is straightforward: to stop individuals and legal entities from misusing a corporation for improper purposes.

Typically, the corporate veil is pierced when the corporation is used to break the law, avoid a debt, commit fraud, or achieve some other wrongful result.  In these circumstances, a court will treat the wrongful acts as if they were done by the individuals controlling the corporation, rather than the corporation itself. 

To pierce the veil, courts must find two things: (i) the corporation and the owner must be so closely tied together that they can’t be separated, and (ii) it would be unfair if the acts in question were treated only as the corporation’s acts.   Courts will look for certain characteristics when determining whether these two requirements have been met. These include:

1. Whether the owner and the corporation “commingle” or mix funds and other assets. Comingling funds can include using corporate money for personal expenses and using corporate assets, such as a vehicle, for personal use;
2. Whether a corporation has failed to follow corporate formalities such as issuing stock, having separate bank accounts, and maintaining corporate minutes and records;
3. Whether ownership of the corporation is concentrated in a small group, such as a family, or a single person;
4. Whether a corporation has been adequately capitalized (i.e., whether there is enough money in the corporation to operate and satisfy liabilities);
5. Whether the corporation is being used as a “shell” or shield for liability;
6. Whether the corporation has maintained arm's-length relationships with its owners and affiliates;
7. Whether the corporation has been used to obtain services or goods for the benefit of some person or entity other than the corporation;
8. Whether any owner has diverted assets away from a corporation to his or herself, or to another person or entity, to the detriment of creditors;
9. Whether an owner has used a corporation solely to avoid meeting an obligation; and
10. Whether the corporation has been created solely for the purpose of assuming an existing liability of the owner or another entity.

No single characteristic is grounds for piercing the veil. Instead, owners of corporations should view these characteristics as rungs on a ladder of risk – the more of these characteristics that are present, the “higher” the owner climbs, and the more likely the veil is to be pierced.

This article is intended to address topics of general interest and should not be construed as legal advice.

© 2019 Noland, Hamerly, Etienne & Hoss