Piercing the Corporate Veil: Unveiling Its Meaning and Examples

As any business professional is aware, incorporating a company can mark a huge investment, offering numerous protections while ensuring the longevity of a business. However, even with all the safeguards in place, there is still a possibility that the protections offered by incorporation may be pierced in the form of “piercing the corporate veil” in a legal case, potentially leaving the individual liable for the business’s debts.

What Does Piercing the Corporate Veil Mean?

The concept of piercing the corporate veil occurs when the protective barrier between a business entity and the individual business owner is disregarded and that individual is held personally liable for the company’s debt and/or actions. Generally, the veil is pierced through a showing of fraudulent or illegal activities, such as using corporate assets for the personal benefit of the owner. Another instance where the veil may be pierced is when corporate formalities have not been observed.

Recent Examples of Piercing of the Corporate Veil

One example of piercing of the corporate veil occurred in 2018 when the U.S. Supreme Court ruled in favor of Anna Rappaport, who established a limited liability company in 2004 to manage her parents’ rental condominiums in California as an investment. While she was the sole owner of the LLC, she allegedly treated it more like a personal asset, failing to maintain separate accounts, record-keeping, and formalities expected of a business. Consequently, when she sold the condominiums and the LLC gained capital, she was unable to pay the taxes due on the capital gains and the IRS sought recovery of the taxes from Rappaport personally. Despite the attempt to distance herself from the LLC by placing it in the hands of a professional taxable lawyer, the veil was pierced and the owner held personally responsible for the LLC’s debt.

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Another instance of piercing the corporate veil occurred in 2019 in a North Carolina court when the owner of a construction business, Carolina Carpenters, was accused of having failed to pay his employees proper wages and did not remit payroll taxes. To avoid paying his employees or the IRS, he transferred all of the assets of the company to his brother. However, the court saw this as an act of fraud and held the owner personally liable for the debts of the company, piercing through the corporate veil.

Related Legal Concepts

Understanding piercing the corporate veil often goes hand in hand with disregarding the corporate entity, which refers to the legal doctrine that allows courts to look beyond the corporate structure. This concept is closely related to maintaining proper corporate formalities outlined in the corporate charter and ensuring decisions are documented through proper corporate resolution procedures. When business owners fail to respect the corporate opportunity doctrine or use corporate assets inappropriately, courts may find grounds to pierce the protective barrier that incorporation typically provides.

The Bottom Line

Piercing the corporate veil represents a significant exception to the general rule of limited liability protection that corporations and LLCs provide their owners. The key lesson is that incorporation alone does not guarantee protection—business owners must maintain proper corporate formalities, keep personal and business finances separate, and avoid fraudulent conduct to preserve their liability shield. For guidance specific to your situation, always consult a qualified, licensed attorney.