Piercing The Corporate Veil

Pierce The Corporate Veil

The first thing you should think about when staring a business is how you can protect yourself from lawsuits or debts that the business may face.  Making the business an LLC, LP, or corporation can shield business owners, members, and stockholders from lawsuits.  However, there are certain situations where a lawsuit can personally target the business owners, shareholders and members. 

How States Can Pierce The Corporate Veil

States can successfully sue business owners if they establish that the business owner put other people’s lives or livelihood at risk for their own gain. This is especially true in situations where a business makes products that are harmful.  In fact, manufacturers and individuals that created the Opiods that caused hundreds of thousands of deaths from 1999 to 2017 have been sued by different states. 

Piercing The Corporate VeilFor example, various state attorney generals have been able to sue the family behind the corporation for the misuse of Oxycontin and other opiods.  Purdue Pharma and the Sackler family are also facing lawsuits from various states. These examples show that protections do not always work. Business owners can talk to lawyers experienced in these areas to determine what protections are offered by their business entity.

How Courts Can Pierce The Corporate Veil

Piercing the corporate veil simply means holding the directors, officers, shareholders, or members liable for the LLC’s debts or other misconduct. Courts can do this in the following situations:

  • A company engages in fraudulent or wrongful actions such as making business deals knowing that the business cannot pay its invoices
  • When there is no formal legal separation between the company and the personal financial affairs of the business owners
  • When a business does not pay bills it owes other companies that do business with it

When the corporate veil is pierced the company no longer has LLC status. This allows creditors to go after the owner’s bank account, home, and other assets if the company was in debt or owed money.

Factors That May Cause A Company To Lose LLC Status

A business can easily lose its LLC or corporate status for the following reasons:

  • When the business owners commingle their personal assets and the assets of the corporation or LLC
  • When a business fails to follow corporate formalities such as holding annual meetings shareholders and directors and not keeping accurate records of those meetings
  • When the company has never really had enough funds to operate 

Experts also indicate that smaller LLCs or corporations are more vulnerable as far as losing  entity  status is concerned. 

How Can You Pierce The Corporate Veil

You can obtain a court judgment against the owners of a defunct corporation or LLC that owes you money. This is possible to do if the corporation or LLC displays some of the characteristics that make a company vulnerable to losing their LLC or corporation status. Suing a smaller business is easier because small businesses rarely follow corporate or LLC formalities. You will need the help of an experienced business lawyer to file a lawsuit against such companies. 

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