What Is Piercing The Corporate Veil?
Piercing the corporate veil refers to the process of holding the individuals behind a corporation or business entity personally liable for the actions or debts of the company. This can occur when the legal distinction between the corporation and the individuals who own and operate it is disregarded by the courts, which can occur for many reasons as discussed below. Piercing the corporate veil is not a theoretical risk facing business owners. Courts have and will pierce the corporate veil in many situations, but especially when many veil-piercing factors are present simultaneously.
Piercing the corporate veil is a topic of intense interest among business owners. Indeed, one of the main reasons that business owners form corporations and other limited liability entities is to conduct business while avoiding personal liability. In the ordinary course of business, companies face numerous risks and exposure to various claims. These claims could relate to the sale of a company’s goods and services, accidents caused by a company’s officers or employees, or contractual disputes with a company’s vendors. Claims are often resolved amicably with a claimant, or a company may maintain insurance to provide for a claim’s defense and eventual settlement.
In many cases, only the assets of a business are at risk to a claim. In others, however, claimants may be successful in piercing the corporate veil to satisfy business debts and liabilities through the business owners’ personal assets. In other words, the protective shield provided by limited liability entities is “pierced,” and successful claimants are permitted to seek redress not just from the assets of the business but also from its owners. The liability protection provided by a corporation or other limited liability entity is not perfect or guaranteed. A business owner should take steps to decrease the likelihood of personal exposure.
What Are Some Factors That Raise The Risk Of Veil-Piercing?
Many factors may increase the risk of veil-piercing. These can include:
It’s important to note that these are just a few examples of the factors that may increase the risk of veil-piercing, and the courts will consider the specific circumstances of each case in determining whether or not to pierce the corporate veil.
Further, the veil-piercing analysis varies by jurisdiction, so local laws must be consulted to determine whether veil-piercing is appropriate or possible under applicable law. Business owners must do their best to steer clear of these and other veil-piercing factors if they want to decrease the chances of veil-piercing and having their personal assets put at risk.
What Is Horizontal Veil-Piercing? Can There Be Vertical Veil-Piercing Too?
Horizontal veil-piercing is a legal concept that refers to the process of holding the owners or operators of two or more separate but related companies personally liable for the actions or debts of the companies. This can occur when the courts find that the companies are being used to commit fraud or other illegal activities, or to avoid personal liability for the actions of the individuals behind the companies or for the other company’s actions. Thus, when veil-piercing factors are present, courts may not look solely to the owners of a business, it may also look horizontally at affiliated or commonly-controlled business entities. Indeed, courts may even look vertically at parent companies depending on the facts and circumstances involved, or downstream to subsidiaries depending on the particular facts and circumstances involved.
In order to establish horizontal veil-piercing, the courts typically must find that the individuals behind the companies have used the business structure to deceive or mislead others, or to evade legal responsibilities or obligations. This can involve demonstrating that the companies are being used to shield the individuals from personal liability for their actions, or that the companies are acting as a single entity in order to mislead or deceive others.
As with standard veil-piercing, horizontal and vertical veil-piercing depends on a fact-based analysis and depends on the specific treatment of veil-piercing under local law.
Direct Claims and Piercing the Corporate Veil
Business-owners should not confuse piercing the corporate veil with their exposure to direct claims for their own actions. A business-owner does not receive blanket immunity from claims just because they operate their business through a corporation or an LLC. There are many situations where an owner, officer or an employee may be subjected to personal liability that does not involve piercing the corporate veil.
To avoid putting their personal assets or other businesses at risk, business owners must avoid veil-piercing factors. In addition, business owners must consider veil-piercing prevention and direct liability exposure as part of managing their business on a day to day basis.
Shared by Geoffrey G. Gussis, Esq., a business lawyer and technology lawyer licensed in New Jersey and New York. Learn more about me, the legal services I provide, and articles I have written. Contact: firstname.lastname@example.org or (732) 898-0549 or (646) 389-2946 for a free consultation.
The materials available at or through this website are for informational purposes only and do not constitute legal advice. You should contact a licensed attorney in your jurisdiction to obtain advice with respect to any particular issue or problem. Use of and access to this website, or any of the information or links contained within the website, does not create an attorney-client relationship.