What Does Piercing the Corporate Veil Mean?

Many people incorporate their businesses in order to avoid becoming personally liable for the company’s losses. When a business is incorporated, owners and shareholders cannot lose more than the money they invested into the business. If the company is not incorporated, but instead is operated as a sole proprietorship or partnership, the business owners could become fully responsible for covering the organization’s financial losses. For example, if a partnership went bankrupt or was sued, the partners who own it could be held personally liable for paying for the partnership’s debts or the judgment against the organization.

The liability protection of a corporation is extremely important, but it is not always absolute. Piercing the corporate veil means that the distinction between the owners and the business is stripped away. The owners become personally responsible for the financial condition of the business, just as they would be if the company was a sole proprietorship. Piercing the corporate veil has serious consequences and you need to understand what piercing the veil means if you own a business or if you are trying to take legal action against an organization with limited financial assets but owners who should be held responsible for the company’s actions.

The Meaning of Piercing the Corporate Veil

Piercing the corporate veil typically occurs when someone, such as a creditor or a person who has been harmed by a business, takes legal action. The plaintiff who is pursuing a claim will argue that the owners of the business should be held personally liable for the money that is at stake. In other words, if the business itself doesn’t have enough money to pay, the owners should have to use their own personal money or assets.

The court will not agree to piercing the corporate veil in just any situation, since the entire purpose of incorporating is to protect owners and allow the business to operate as its own independent “person.” However, the court will pierce the corporate veil in situations where the owners, directors or shareholders of the business failed to follow corporate formalities or acted inappropriately.

Some examples of situations where piercing the corporate veil is possible include cases when:

• The company wasn’t really separate from its owners. If the owners failed to actually maintain the business as its own separate entity, the corporate veil must be pierced. For example, the company’s owners may have co-mingled business and personal funds; used the company’s assets as their own; and failed to have annual meetings or follow the company’s bylaws. Under these circumstances, the business and owners were really one-in-the-same and should be treated as such.
• The actions of the owners were fraudulent or wrongful. For example, if owners recklessly made deals knowing the business couldn’t pay or if they created a company solely to escape responsibility for debts, then this is an example of a situation where piercing the corporate veil may be appropriate. Creditors or those who are left with unpaid bills shouldn’t be forced to shoulder the financial loss because the owners gamed the system by incorporating.

Contact a California Business Litigation Attorney

Brown & Charbonneau, LLP can help you to maintain corporate formalities to reduce the risk of piercing the corporate veil. Our business litigation attorneys can also help in cases where the issue of piercing the corporate veil arises in court. Call today 714-505-3000 or use our online contact form to schedule a consultation and learn more.