Piercing The Corporate Veil
Definition of Piercing the Corporate Veil. Definition: Piercing the Corporate Veil: A situation in which courts put aside limited liability and hold a corporation’s shareholders or directors personally liable for the corporation’s actions or debts. Veil piercing is most common in close corporations. Piercing the corporate veil or lifting the corporate veil is a legal decision to treat the rights or duties of a corporation as the rights or liabilities of its shareholders. Usually a corporation is treated as a separate legal person, which is solely responsible for the debts it. Alter Ego Liability or Piercing the Corporate Veil in Colorado. In general, the purpose of creating a business entity is to insulate the owners and shareholders of that business from personal liability.
A key reason that owners and managers choose to form a or (LLC) is so that they won't be held personally liable for debts should the business be unable to pay its creditors. But sometimes courts will hold an LLC or corporation's owners, members, and shareholders personally liable for business debts.
When this happens it's called 'piercing the corporate veil.' In these tough economic times, many small business owners are scrambling to keep their companies afloat or are closing down. If a corporation or LLC ends up having to shut its doors, the last thing a small business owner wants is to have to pay the business's debts. But when cash is tight and owners aren't careful, if an unpaid creditor sues for payment a court might 'pierce the corporate veil' (lift the corporation or LLC's veil of limited liability) and hold the owners personally liable for their company's business debts.Read on to learn the rules about piercing the corporate veil. (To learn about other ways you can become personally liable for corporate debt, see Nolo's article ). Need to Pierce a Corporate Veil?If you are a business or service provider who provided goods or services to a company and didn't receive payment, you are on the other side of the problem.
Piercing The Corporate Veil Doctrine
You may have tried to sue for payment, but when you attempted to collect the court judgment or debt, you found out the company is 'defunct' (closed down) and has no assets. If you're lucky, the defunct company's owners may still have assets (and may even plan to go on to use their assets and contacts to start a new corporation or LLC). You may be able to access the owners' assets by piercing the corporate veil.
We'll discuss this further below. Corporate Liability for Business DebtsCorporations and LLCs are legal entities, separate and distinct from the people who create and own them (these people are called corporate shareholders or LLC members). One of the principal advantages of forming a corporation or an LLC is that, because the corporation or LLC is considered a separate entity (unlike partnerships and sole proprietorships), the owners and managers have limited personal liability for the company's debts.
This means that the people who own and run the corporation or LLC cannot usually be held personally responsible for the debts of the business. But, in certain situations, courts can ignore the limited liability status of a corporation or LLC and hold its officers, directors, and shareholders or members personally liable for its debts. When this happens, it is called piercing the corporate veil. Closely held corporations and small LLCs are most likely to get their veils pierced (corporations that are owned by one or just a few people are called closely held corporations, or close corporations for short). Effects of Piercing the Corporate VeilIf a court pierces a company's corporate veil, the owners, shareholders, or members of a corporation or LLC can be held personally liable for corporate debts. This means creditors can go after the owners' home, bank account, investments, and other assets to satisfy the corporate debt.
But courts will impose personal liability only on those individuals who are responsible for the corporation or LLC's wrongful or fraudulent actions; they won't hold innocent parties personally liable for company debts. When Courts Will Pierce the Corporate VeilCourts might pierce the corporate veil and impose personal liability on officers, directors, shareholders, or members when all of the following are true.
There is no real separation between the company and its owners. If the owners fail to maintain a formal legal separation between their business and their personal financial affairs, a court could find that the corporation or LLC is really just a sham (the owners' alter ego) and that the owners are personally operating the business as if the corporation or LLC didn't exist. For instance, if the owner pays personal bills from the business checking account or ignores the legal formalities that a corporation or LLC must follow (for example, by making important corporate or LLC decisions without recording them in minutes of a meeting), a court could decide that the owner isn't entitled to the limited liability that the corporate business structure would ordinarily provide. The company's actions were wrongful or fraudulent. If the owner(s) recklessly borrowed and lost money, made business deals knowing the business couldn't pay the invoices, or otherwise acted recklessly or dishonestly, a court could find financial fraud was perpetrated and that the limited liability protection shouldn't apply.
Piercing The Corporate Veil Examples
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