Piercing the Corporate Veil

Piercing the corporate veil is an unsavory risk of doing business. Knowing how it happens means knowing how to prevent it from happening to you.

Virginia Limited Liability Company (LLC)

As the name suggests, limited liability company is a single or multi-member business structure that offers limited personal liability. In other words: the debts of the business cannot be held against your personal assets.

As an owner, or “member”, you are required to obtain the proper permits and licenses for your business. Additionally, you are responsible for filing all necessary paperwork in order to operate.

Business Liability

There are many forms of business liability, and as the technological practices of businesses evolve, so do the liability considerations.

Some liabilities of a business include:

  • Payments for services to the business
  • Anticipated invoices for services to the business
  • Advanced payments of services not yet rendered (to be returned to the client, should a refund be offered at the time of purchase and requested thereafter)
  • Taxes (generally, income, payroll, and sales)
  • Employee wages (including benefits offered, such as pension, insurance, retirement, etc.)

These are only a few of the liabilities that a company is responsible for managing. Other liabilities to consider include meeting OSHA regulations, and renewing all contracts, permits, registrations, and licenses.

A common liability that businesses generally carry is ongoing debt. If there is not enough capital to keep the business running while also paying the debts owed by the business, collectors can request their debts from the remaining business assets.

Additionally, it is important to meet all formal operating requirements. Failing to obtain basic legal formalities creates a personal liability risk that may later invite a lawsuit.

Personal Liability

By definition, personal liability is “a financial obligation for which an individual is responsible and which may be satisfied out of his or her assets.” In other words: your personal assets can be substituted as payment for unsettled business debts.

A limited liability company is formatted in order to limit your liability regardless of the number of members. Whether you are the sole member or you are one of many, your liability limitations remain the same.

Your personal assets, such as your home, personal accounts, interests, or any other assets that are separately owned by you cannot be claimed by creditors of the business. You are able to maintain limited personal liability by keeping your personal and business assets separate.

“Piercing the Corporate Veil”

If you have established a limited liability business and that business becomes unable to settle its accrued debts, a court may deem you personally liable for those debts. The ability to waive your limited liability is called “piercing the corporate veil.”

Under law, you and your business are separate entities. However, a court is able to bypass limited liability and hold you personally accountable for business debts.

When the corporate veil is pierced, you are personally liable for the settlement of those debts. As the single owner of an LLC, this can become burdensome because you alone are held liable. Therefore, creditors have the ability to pursue your home, personal accounts, interests, or any other feasible assets. In a partnership or a multi-member LLC, the guilty parties are considered for liability, and those who are not at fault are not personally penalized.

The corporate veil can be pierced under a number of circumstances, if found guilty by the court:

  • Failing to maintain the formal separation of your business and personal assets may lead to a suit against your business. When you establish your business, you must operate that business under the regulations that are locally, state, or federally enforced. Keeping business and personal finances entirely separate is one of the best methods of safeguarding against a personal lawsuit.
  • Practicing business in a fraudulent manner is another way to land yourself with a lawsuit. Financial irresponsibility, accruing unreasonable debt, or conducting dishonest business are examples of fraudulent behavior. If you are found suspect of committing financial fraud, your limited liability may not protect you from personal liability.
  • Contracting another business in order to have a service performed for your business is a business debt. However, failing to pay that debt upon invoice or court order leaves you vulnerable to the court’s decision to pierce the corporate veil. The court will seek to settle the debt against your business in a fair manner, and if your business assets are not suitable, your personal assets may be assessed.

Business Liability Insurance

Opting for business liability insurance protects your business assets from unexpected events, such as an injury on the job or damages. However, business liability insurance also protects your assets should you find yourself served with a lawsuit. Your defense is covered in your liability insurance, as well as any settlement you are charged with paying.

Business liability insurance is also a protection in suits of false advertisement, libel, and copyright infringement. Ultimately, your business liability insurance seeks to protect you from any personal liability that may arise.

Conclusion

Keeping a separation of your personal and business practices allows you to prevent piercing the corporate veil. However, there are multiple options for how you can protect yourself against personal liability.

Schedule a consultation with our business law attorney to discuss your business plan and assess your liability risk.

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