top of page

Piercing the Veil – Ignoring the Entity

Updated: Nov 11, 2023

More often than not, clients want a limited liability entity (corporation, LLC, etc.) for one main reason: the limited liability. As discussed here, limited liability caps a business owner's legal liability at their interest in the business.


However, in some cases, a court will ignore that limited liability shield. This means that courts will impose personal liability on the constituents of the entity (for example, shareholders of a corporation).


This is called "veil piercing" or "piercing the corporate veil." And don't let the word "corporate" mislead you; courts also do this for any limited liability entity, including LLCs.


Each state has its own particular rules for piercing the veil. For example, California courts have developed a two-prong test for piercing the corporate veil, and includes dozens of factors that may be considered. The Texas legislature created an actual fraud standard for veil piercing. Other states may have different rules for veil piercing.


There are steps LLC members, corporate shareholders, LP limited partners, etc. can take to avoid finding themselves personally liable. For example:

  1. Do not use your entity to defraud anyone (obvious enough);

  2. Keep your entity's records accurate and up-to-date;

  3. Pay the entity's taxes;

  4. Keep the entity's funds separate from your own (no commingling);

  5. Do not use the entity's property as your personal property; and

  6. Maintain adequate capitalization (make sure the entity has property).

These are some of the most common factors considered. Depending on the facts of a case, one factor might be sufficient for veil piercing. In another case, ten factors might not be enough to pierce the veil.


Bear in mind that veil piercing is not a separate cause of action. It's a means of imposing that cause of action on a party that would otherwise be unavailable due to the liability shield. This means that you won't be sued for it, but you can be sued for something else (for example, breach of contract) via veil piercing.


Summary


Although having a limited liability entity can shield you from liability, there are times courts will ignore that shield. It is critical to maintain records, pay taxes, and take care of all the other requisite formalities to avoid veil piercing.

2 views0 comments

Recent Posts

See All

Best States for Nonprofits (January 2023)

You often hear about which states are best or toughest for businesses with regard to taxation, regulation, complexity of starting up, etc. Various organization conduct such studies and with relative

SB 1079 – Bidder Beware

In 2020, California passed SB 1079, called the "Homes for Homeowners, not Corporations" bill, going into effect January 1, 2022. See especially Civ. Code section 2924m (which sunsets January 1, 2026).

Nonprofits and the War in Ukraine

Last week, on June 2, 2022, the Russian invasion of Ukraine passed the 100-day mark. The conflict has been brutal. Casualties number in the tens of thousands. There are as many as seven million refuge

תגובות


bottom of page