What Does It Mean to Pierce the Corporate Veil?

Generally, the members or shareholders of a business are not liable for the obligations of the company. This protection is the “corporate veil.” However, the veil can be pierced and the individual(s) held liable for the actions of the company in certain circumstances.

  • The veil can be pierced when there is no real distinction between the individual and the entity, that is, the entity is just an alter ego of the individual.
  • The veil can also be pierced when the entity is only a sham to promote fraud.

To avoid the corporate veil being pierced, it is important that the business owner follow all corporate formalities. This means ensuring the company documents, such as the operating agreement and minutes of the company meetings, are in order. Personal and business assets should not be commingled. The entity should have its own records and bank account(s). Business assets should not be used to pay personal bills, and vice versa. The rightful purpose of a company is to run a business, not to perpetrate fraud on its consumers.

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