Piercing the corporate veil is an equitable remedy used in commercial litigation when fairness would not be achieved by allowing liability to rest solely with the corporation. Although corporations exist independently from their owners, personal liability can still be imposed on owners and shareholders in cases where fraud or other wrongdoing occurred. When the corporate veil is pierced, the personal assets of any owner deemed responsible for the wrongdoing can be taken to satisfy the company’s debts.
What Does “Piercing the Corporate Veil Mean?”
LLCs and corporations offer owners certain legal protections against liability. Owners generally cannot be held personally liable for the company’s debts — or claims made against the corporation. This separation between the owners and the corporation is known as the “corporate veil.”
The personal assets of an owner or shareholder typically cannot be seized to satisfy any judgments or debts of the company. However, in some cases, owners are not granted these protections and they may incur liability. This is referred to as “piercing the corporate veil.”
When Can the Corporate Veil Be Pierced?
Under New York law, the corporate veil can be pierced when two elements are met: 1) the corporation’s owners had complete control over the corporation and failed to treat it as a separate business entity, and 2) the owners used this control to commit a fraud or wrong that harmed another. The plaintiff must prove each element by a preponderance of the evidence — which means they must be able to persuade a jury that their claim is more likely true than not.
Importantly, a plaintiff must demonstrate a connection between the owners’ control and the harm the plaintiff suffered. Some common scenarios where the corporate veil may be pierced can include:
- Commingling personal and business assets
- Disregarding the corporate entity
- Failure to follow corporate formalities
- Using corporate assets for personal needs
For example, if a business owner attempts to hide assets from creditors by shifting funds between personal and business accounts, the corporate veil may be pierced. An owner can also be held personally liable if they use the corporate structure to engage in fraudulent activities.
How Can Business Owners Protect Themselves from Incurring Personal Liability?
There are several measures business owners can take to avoid personal liability due to corporate veil piercing. Notably, an owner should maintain the legal separation from themselves and the corporation. They should ensure the company has adequate capital, keeps accurate records, and observes all corporate formalities. In addition, it’s crucial to have a separate bank account for the company to ensure that personal assets are not mixed with business assets.
It’s also vital to act in good faith — and with transparency — in all business dealings. This means conducting business honestly and fairly, and making decisions that are in the best interests of the company, rather than for personal gain. Significantly, a business entity should never be used to perpetuate fraud or deception.
Contact an Experienced Long Island Business Attorney
If you are facing a corporate liability matter, a skillful business attorney can help ensure your legal and financial rights are protected. At Barnes & Barnes, P.C., we offer high quality legal services and reliable counsel for a wide range of business matters, including those involving piercing the corporate veil. Contact us at (516) 673-0674 to schedule a consultation.
