A Peek Behind the Veil: What Piercing the Veil Means

For business owners, investors, and entrepreneurs, the concept of “piercing the veil” is an important legal concept to understand. It has the potential to dramatically change the outcome of a case or a legal matter, as it essentially creates a direct relationship between the business owner or investor and the business itself. Here’s what you need to know about piercing the veil.

What Does Piercing the Veil Mean?

Piercing the veil essentially means that a court or other legal body sees the actual business owner or investor as an entity separate from the business being discussed. That means if you are a business owner, your personal assets and liabilities could be put at risk when it comes to any disputes that arise from your business activities. Conversely, the court can also assign your business’s assets and liabilities to you personally.

The concept of piercing the veil originates from a legal concept called the corporate veil. This veil exists to separate the individual from the business in most legal cases. But in certain circumstances, this veil can be lifted, “pierced”, to connect the individual and the business and make them both legally and financially liable for any issues that arise.

How Does the Corporate Veil Get Pierced?

Piercing the veil is not a common occurrence, and it’s difficult to prove that the corporate veil should be lifted. Generally, courts will require evidence of certain activities or factors in order to pierce the veil. These factors include things like fraud, breach of fiduciary duty, use of straw men, mismanagement and undercapitalization, or a disregard of the corporate form.

Another factor that can impact whether or not the veil is pierced is how well the company is treated in terms of legal filings and paperwork. For instance, if a company does not adhere to norms for corporate formalities, such as regular meetings and documenting major decisions, a court is more likely to pierce the corporate veil.

What Can Happen if the Veil Is Pierced?

If a court does pierce your corporate veil, there can be major consequences. Some of the possible consequences include:

  • The owner may be held liable for the debts and liabilities of the business.
  • Personal assets may be seized to pay the company’s debts.
  • The owner may be personally responsible for any illegal activities that the business has committed.

The good news is that these penalties are rarely applied, as they require a court to really dig deep into the company’s activities and operations to prove that the corporate veil should be pierced. It’s important to do everything you can to avoid the possibility of it being pierced, such as maintaining good corporate formalities and transparency.

Protecting Your Business and Yourself

Keeping the corporate veil intact is of the utmost importance for small business owners. It’s important to do everything you can to maintain this distinction between yourself and your business, and to make sure you do not ignore corporate formalities or engage in any risky or illegal activities. By doing so, you can protect your business and your personal assets.