What is “piercing the corporate veil”?

Even though you incorporated your business specifically for the purpose of protecting your personal assets from business creditors, courts can still “pierce the corporate veil” under some circumstances to allow a creditor to recover from the corporate principals personally on debts that were intended to be incurred on behalf of the corporation. In particular, courts have identified a wide variety of factors that they examine to insure that, after incorporation, the firm’s business was treated as belonging to the corporation rather than to its individual owners. For example, courts will look to see whether corporate formalities were maintained (was stock issued? were bylaws adopted? were directors’ and shareholders’ meetings held? were proper minutes kept?) and whether the separation between corporate and individual funds was recognized (were corporate and individual funds segregated or commingled? were corporate funds used to pay individual expenses?). If so, then the separate corporate existence will be respected; if not, then the court may pierce the corporate veil and permit a shareholder’s personal assets to be reached to satisfy a corporate obligation. For more information on piercing the corporate veil, see our articles on Reducing Risk of Alter Ego with Some Simple Things and Piercing the Corporate Veil: A Rare and Drastic Result.