When forming a business, entrepreneurs almost certainly formed an entity to protect their personal assets. Many business owners chose to form corporations or limited liability companies (LLCs), which are distinct, separate entities from their owners. A main consideration of choosing a corporation and/or an LLC as an entity is that the business’s owners, members, and/or shareholders have limited liability with respect to any debts or obligations incurred by the business. This means creditors cannot go after the individual assets of the people who own the business. Check out “Why Entrepreneurs Should Form Corporations or LLCs” for more details on choosing a business entity. And if this does not support this position, the ABA examined this trend recently as well: http://apps.americanbar.org/litigation/committees/businesstorts/articles/summer2013-0713-trends-in-jurisprudence-piercing-the-corporate-veil.html
Ordinarily, if there are claims on the business assets, only the business’s assets will be distributed to creditors. However, on occasion, courts will “pierce the corporate veil” and hold an individual personally liable for the company’s debts and obligations. The corporate structure is the “veil” that protects the individual and when that veil is pierced, the individual is no longer protected. Creditors may go after any personal assets of that person, including his or her home, bank accounts, real and personal property, and investments. It is important to note, that only the individuals who are responsible for the business’s fraudulent or wrongful actions will be personally liable – innocent parties will not be held responsible.
How exactly does the corporate veil get pierced and who does the piercing? There are several justifications for piercing the veil, but none are cut and dry. Closely held corporations and smaller LLCs experience piercing more often than larger corporations or LLCs, but larger corporations are not bulletproof. Generally, the corporation’s or LLC’s veil is pierced if the corporation or LLC is undercapitalized, where corporate formalities are not followed, where the corporation is merely an “alter-ego” of its shareholders or members, or where the corporation is used to promote fraud or injustice.
For almost 20 years Kim Lowe has lawyered from the trenches. Kim lawyers from experience, using her knowledge of the law and understanding of how both for-profit and nonprofit business enterprises operate.
Emilee Walters is a second year law student at St. Thomas School of Law. Emilee is an Avisen Fellow exploring a legal career in business law.