Piercing the Corporate Veil – What is it?
Often you might see in legal documents that a corporation is referred to as a “person,” which is a reference to the corporation having a distinct separation from its owners. A corporation (or LLC) is found by law to be a separate legal entity from its owners. This distinction between the ownership and the entity serves to keep liability within the entity and is sometimes referred to as the corporate veil. It is when this distinction becomes a distinction without a difference that owners can be held liable for actions of the corporation—known as piercing the corporate veil.
There is no one test for piercing the corporate veil as set forth by the courts. Often courts use a summation of the owners’ acts such as: disregarding the corporate form, failing to keep proper records, ignoring the corporate governance structure, disregarding the economic separation of the entity from the owner (e.g. using corporate funds for personal expenses), under-capitalizing the company, and siphoning of funds out of the corporation.
These factors used in the analysis of the court differ depending on the entity used by the business owners. For instance, because the LLC entity was created to allow business owners more freedom in corporate governance, the LLC factors for piercing of the corporate veil would be more relaxed when looking at whether the LLC followed the exact requirements for documentation of regular owner meetings.
This short explanation of the liability protection afforded by the corporate form to owners iterates the importance of thoroughly examining the type of business entity that is right for your business needs. The decision on the type of entity form that is right for your needs should always be examined with the professional help of an attorney with experience in business formation matters.