Auto Accident Law 101

Piercing The Corporate Veil: What It Means And Why It Happens

14 April 2016

Everett Cook

Corporations are, in a lot of ways, like fictional people with a legal status all their own. They can do business, make contracts, and owe debts separate from their owners. The status of a corporation as an entity with legal differences from its owners is called "the corporate veil," and it exists entirely to protect its owners from personal liability should the company get it into trouble. However, the court will sometimes order an end to that legal separation. If you own a company through a LLC, LLP, or any other corporate status, learn more about what it means to pierce the corporate veil and when it happens.

What happens when the corporate veil is pierced?

If the court decides that it is appropriate to pierce the corporate veil, you and any other owners, directors, and officers of the company could be personally liable for the wrongdoings of the company. That means that your personal assets—not just the assets belonging to the company—can be used to pay the company's debts or fines and you could also face criminal prosecution if the situation warrants it.

For example, the Department of Justice prosecuted and convicted the CEO, the quality assurance manager, and the food broker of the Peanut Corporation of America (PCA) for fraud, conspiracy, and other crimes related to a deadly salmonella outbreak. The decision to hold those individuals personally liable, rather than just fine the company, came about because the DOJ determined that they lied to customers, fabricated records, and ignored test results that showed possible contamination. In another case, two of the pharmacists that controlled the New England Compounding Center (NECC) have been charged with a total of 25 murders related to a deadly meningitis outbreak after they allegedly shipped vials of medication that they knew were contaminated to clinics around the country. 

What can allow the court to pierce the corporate veil?

There are several legal theories that the courts can use to pierce the corporate veil and hold business owners liable for the debts and crimes of the business. One situation is where corporate formalities haven't been observed—formal meetings of officers aren't held, minutes of meetings aren't recorded, or bylaws aren't created or are outright ignored. If you run a small business with your family members as the other officers, you may be lax in those areas, which could put you at significant risk in court.

The courts can also pierce the corporate veil if they determine that there's really no difference between you, the owner, and you, the business. That's most likely to happen if you pay your personal debts out of the business account, co-mingle your own funds with the company funds, or use business loans for personal items. 

Fraud and reckless behavior are other reasons that a court can use to dismantle the separation that exists between you and your company. In the cases where there's been criminal prosecution, the courts have looked at the behavior of specific individuals in key company positions in order to determine if those individuals knew that financial fraud was taking place or people's lives were being endangered. This can also happen in bankruptcy cases when a company seeks protection from debtors. If the bankruptcy court determines that it's unfair to allow you to keep your personal wealth while your company goes under and creditors suffer, it may pierce the veil.

Because there's often no one factor that determines whether or not a court will allow the corporate veil to remain in place, it's important to seek legal counsel from a lawyer like those represented at carterwestlaw.com anytime your company may face a lawsuit as soon as possible. 

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