What Does “Pierce the Corporate Veil” Mean?

No, it doesn’t involve a safety pin or have anything to do with a wedding.  This is one of those often-used yet rarely-explained phrases that every small business owner should understand.

If formed and managed properly, corporations and LLCs are treated as legal entities separate from their owners.  This is why we business lawyers are constantly nagging sole proprietors to form a legal entity.  Doing so allows the business owner to protect his or her personal assets from lawsuits against the company.  Without a legal entity, a sole proprietor’s home, bank accounts, cars, etc. can be lost in court.  The formal legal entity, such as a corporation or LLC, provides a “veil” of protection between the company’s assets and those of the business owner.

But it’s not enough just to incorporate.  You must also treat your company as a separate entity, including having separate business bank accounts, separate business books, paying only business expenses out of your business account, observing corporate formalities including holding all required meetings of company officers, and diligently maintaining your corporate records.

If you manage your business properly, a judgment against your company will be limited to the company’s assets and your personal assets will remain untouched.

If, however, you commingle funds between your personal and business accounts, fail to adequately capitalize your business, or fail to observe corporate formalities, a court may justify piercing the corporate veil and hold you personally liable for any actions of the company, putting your personal assets at risk.

So there you have the scary legal story of the week.