By Purple Fox Legal
November 30, 2022
If you’re an entrepreneur, small business owner, or provide business consulting under an LLC in New York or Tennessee, “piercing the corporate veil” is a phrase you need to understand to protect yourself and your business.
Piercing the corporate veil refers to a situation in which courts put aside limited liability and hold a corporation’s shareholders or directors (or LLC owners) personally liable for the company’s actions or debts. This is most common in closely held organizations, such as corporations or LLCs, which are owned by a limited number of individuals and are not publicly traded.
The law for piercing the corporate veil varies state by state. Generally, courts have a strong presumption against piercing the corporate veil and will only do so if there has been serious misconduct.
Also, courts understand the benefits of limited liability, as it encourages the development of public markets for stocks, thus helping make possible the liquidity and diversification benefits that investors receive from these markets. Because of this, courts generally will require agents of LLCs or corporations to engage in fairly egregious actions in order to justify piercing the corporate veil. This misconduct may include abusing the corporation via intermingling of personal and corporate assets or having undercapitalization at the time of incorporation.
While different states use different standards to determine whether to pierce the corporate veil and hold a business owner personally liable, courts will generally pierce the corporate veil when the parent company controls and dominates its subsidiary. This happens when the affairs of the parent company and its subsidiary are so intermingled that fairness demands that the acts of the subsidiary be considered as the acts of the parent company. In cases like these, the subsidiary is referred to as an “alter ego” of the parent. Most courts require that there be an element of injustice and unfairness in addition to domination and control to pierce the veil.
The analysis into piercing the corporate veil is very fact intensive and there are a number of factors that courts look at when it comes to determining whether the subsidiary is merely an alter ego of the parent. No single factor is the sole determinative factor. In most cases, it takes a combination of factors being present before a court in order for the court to find that the subsidiary is indeed the parent’s alter ego.
If you’re an entrepreneur, involved in business consulting under your own LLC, or run a small business, make sure to educate yourself on what it takes to pierce the corporate veil in order to protect your personal assets from the potential of accruing business debts and liabilities.