Piercing the corporate veil is inherently complex and fact-specific, making it unpredictable. Courts must balance the need to uphold the principle of limited liability, which encourages entrepreneurship and investment, against the need to prevent misuse of the corporate form or entity.
Generally, the creditor will sue and win against a corporation, then sue the director or the shareholder of the corporation. In suing the individual shareholder or director, the creditor asks the judge to pierce the corporate veil following the corporation's failure to pay the debt.
C corporations provide limited liability protection to owners, who are called shareholders, meaning owners are typically not personally responsible for business debts and liabilities.
Suing an LLC with no assets is possible, but often unproductive financially. LLCs shield owners' personal assets, so winning may not yield payment. If you're wondering whether having no assets protects you from lawsuits against your LLC, it's important to understand the limitations.
If the corporation or LLC cannot pay its debts, creditors can normally only go after the assets owned by the company and not the personal assets of the owners. However, the business owner can also be held responsible for corporate or LLC debts in certain situations.
Courts have held that piercing the corporate veil is "an extreme remedy, sparingly used." Furthermore, the plaintiff in a lawsuit has the burden of proving that the corporate veil should be pierced.
Don't Commingle Company and Personal Funds
Simply put, create separate banking accounts for your company and your personal accounts, and never mix the two.
However, just forming an LLC or corporation does not automatically provide limited liability protection. In order for limited liability to exist, the business owner must operate their LLC or corporation correctly so that the corporate veil that provides the limited liability is not pierced.
Courts in California look at various factors to determine whether piercing the corporate veil is appropriate, such as: Commingling of Funds: If personal and business funds are mixed without clear separation. Failure to Follow Corporate Formalities: Lack of proper meetings, records, or adherence to by-laws.
Closely-held corporations and small LLCs are most likely to get their veils pierced (corporations that are owned by one or just a few people are called closely held corporations, or close corporations for short).
We develop a new theoretical framework that posits that veil piercing is done to achieve three discrete public policy goals, each of which is consistent with economic efficiency: (1) achieving the pur- pose of an existing statute or regulation; (2) preventing shareholders from obtaining credit by misrepresentation; and ...
Corporate shareholders are most likely to be held personally liable for the firm's debts when they have personally guaranteed the corporation's obligations or have engaged in fraudulent or illegal activities that pierce the corporate veil. 14.
A court may pierce the corporate veil if it finds that the separation between you and your business isn't sufficient. This means a creditor or affected party might be able to sue you personally for the business's actions.
Evidence of inequitable results
A court will pierce the veil only if a failure to do so will result in an injustice. This requires more than evidence that a creditor will not get paid. It requires evidence that the corporation or LLC was used in some way to perpetrate a fraud or accomplish some other wrongful purpose.
A limited liability company is the first step toward creating a hidden asset that is obscured from public record—but not if your name is listed on it. Think of it like this: if you put an asset down as owned by an LLC, and you are listed as a member of the LLC, well, then you're not really hiding the assets.
Getting paid as a single-member LLC
This means you withdraw funds from your business for personal use. This is done by simply writing yourself a business check or (if your bank allows) transferring money from your business bank account to your personal account.
We develop a new theoretical framework that posits that veil piercing is done to achieve three discrete public policy goals, each of which is consistent with economic efficiency: (1) achieving the purpose of an existing statute or regulation; (2) preventing shareholders from obtaining credit by misrepresentation; and ( ...
A less familiar, but related, concept is that of “reverse veil piercing,” when a judgment creditor is permitted to enforce a judgment against the corporation for the debts of the shareholder, rather than the other way around. Historically, this legal theory was not favored in California.
Courts will disregard the corporate entity, allowing for individual shareholders, directors or officers (i.e. the “alter-egos”) to be held liable in certain circumstances. This is also known as “piercing the corporate veil.”
Understanding an LLC's limited liability protection
This separation provides what is called limited liability protection. As a general rule, if the LLC can't pay its debts, the LLC's creditors can go after the LLC's bank account and other assets.
Given this separate legal existence, one of the primary benefits of doing business through a corporate entity is the general rule that individual shareholders and officers are usually not personally liable for the debts and liabilities of the corporation.
Because a corporation is a legal entity separate from its owners, it continues to exist even when owners die or leave the business. If the formation documents don't limit the corporation's term of existence, it will remain in existence until articles of dissolution are filed with the state.