When someone starts a business, he or she may eventually go incorporated so as to separate his or her personal and business lives. If the business suffers a loss, the owner and shareholders cannot be held personally liable for it or lose more than the amount they initially invested. If a business owner chooses not to incorporate his or her company, personal finances could be affected when the business suffers a financial loss.
In some rare situations, the owner of a corporation could be personally responsible through something called “piercing the corporate veil.” When the corporate veil has been pierced, that distinction between business and business owner is removed and the owner holds personal financial responsibility for debts and other judgements against the business. This could be quite detrimental to the business owner and shareholders.
When Is Piercing the Corporate Veil Possible?
There are a lot of situations in which business owners are protected because they have incorporated their businesses, and that’s exactly what that protection is meant for. Unfortunately, those business owners and shareholders can’t do anything they want with the assumption they’ll always be protected.
If an individual or creditor files legal action against the business and asks the court to pierce the corporate veil, chances are the owners, shareholders and directors acted inappropriately or failed to follow typical formalities in business, and should be responsible for it. The following are a few examples of when piercing the corporate veil might be possible.
- When the owner failed to keep his or her business separate from personal finances. Perhaps the owner initially became incorporated as a protection, but dipped into business cash for personal expenditures. Maybe he or she took out a personal loan for an improvement within the company. Doing those things blurs the line between personal and business, and could be cause for piercing the corporate veil.
- When the owner was blatantly fraudulent. For example, a business owner may have used a line of credit for some large purchases, knowing he or she would never be able to make the payments. Another example might include a business owner incorporating because he or she was trying to avoid responsibility for certain debts. In these situations, piercing the corporate veil might be possible based on the blatant fraud committed.
Getting Help From a Lawyer
Whether you’re a business owner accused of wrongdoing, or are someone trying to sue a business owner through piercing the corporate veil, you need representation. Contact a business lawyer, such as from Brown Kiely, LLP, to get that help you need.