“Piercing the corporate veil” refers to situations where courts put aside the concept of limited liability and hold a business’s members and owners personally liable for the business’s actions or debts.
Virginia courts generally set a high bar for cases where piercing the corporate veil is applicable, and generally reserve this topic for instances of gross misconduct.
For example, the most common scenario where piercing the corporate veil becomes applicable is when a business owner intermigles their business’s assets with their own.
As you might imagine, this can be a very serious topic when it comes to limited liability companies (LLCs), as the whole point of this business structure is to limit the personal liability of the members in the event something goes wrong.
In this article, we’ll cover the basics of what piercing the corporate veil is and why it matters for your business.
Note, however, that we strongly suggest you speak with an attorney immediately if you’ve found yourself mingling your personal and businesses assets, as this is an immediate problem that you should solve as soon as possible.
Business Formation and Personal Liability Basics
When you form a new business your main concern should be safeguarding your personal assets in the event something goes wrong.
Importantly, the biggest decision you can make at this point in time is deciding on which entity structure best protects your interests while also separating your business’s liabilities from your own.
There are many forms of business liability, and as the technological practices of businesses evolve, so do the liability considerations.
As a few quick examples of liabilities you should watch out for, you should generally account for all of the following in your business plan and finances:
- Payments for goods acquired or services rendered on behalf of the business (cleaning services, product inventory, etc.).
- Payments for leases or other large, recurring payments.
- Payments on ongoing debt taken out on behalf of the company.
- Advanced payments for services that are disputed or not yet rendered (such as refunds).
- Quarterly and annual tax obligations (income, payroll, and sales).
- Employee wages and benefits (such as insurance, 401k payments, etc.).
- Compensatory and other damages (in the event of a lawsuit).
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, without a formal organizational structure (i.e. if you’re operating as a sole proprietorship or partnership) your personal assets can be substituted as payment for unsettled business debts.
For this reason, many business owners choose to incorporate as limited liability companies (LLCs) in order to limit their personal liability should the business not have the capital to pay for the liabilities mentioned above.
After all, if only the business is liable for any unsettled debts, the creditors cannot go after the owners unless they mingled their own finances with those of the business.
This, importantly, is why the concept of piercing the corporate veil is so important, as it establishes the basis for when a business’s owners are personally responsible for the liabilities of the business.
Piercing the Corporate Veil and Business Liability in Virginia
If you’ve 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 of a court to waive your limited liability is called “piercing the corporate veil.”
Under law, you and your business are separate entities. However, in certain egregious cases 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 any debts or financial obligations taken on by your business.
This means that creditors can go after your home, personal accounts, interests, and 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.
Guarding Against Personal Liability
The safest way to guard against your personal liability for business practices is to establish a business model that offers limited liability.
A limited liability company (LLC) is the best option for protecting your personal assets.
With an LLC, you are able to have single or multi-ownership of the business.
Rather than having the full liability of sole proprietorship or the shared liability of a partnership, your LLC status protects you from being personally liable.
Additionally, conducting business in a lawful manner safeguards you from additional liability concerns, such as piercing the corporate veil.
Establishing your limited liability business is not your only action in protecting your personal assets; you must still conduct business lawfully in order to protect yourself from liability.
Business Liability Insurance
Opting for business liability insurance is another important way to protect 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.
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.
For this reason, you should schedule a consultation with an experienced business law attorney to discuss your business plan and assess your liability risk.
- 11 Ways an Attorney Can Help You Start a New Business in Virginia
- “Doing Business As” (DBA) Registration in Virginia
- How to Start a Business in Virginia: A 10-Step Guide
- Virginia Limited Liability Company Taxes