Courts would hold an LLC or corporation’s owners, members, and shareholders personally liable for business debts. If a corporation or LLC ends up having to shut its doors, the last thing a small business owner wants is to have to pay the business’s debts. But when cash is tight and owners aren’t careful, if an unpaid creditor sues for payment a court might “pierce the corporate veil” (lift the corporation or LLC’s veil of limited liability) and hold the owners personally liable for their company’s business debts. Courts might pierce the corporate veil and impose personal liability on officers, directors, shareholders, or members when:
There is no real separation between the company and its owners.
The company’s actions were wrongful or fraudulent.
The company’s creditors suffered an unjust cost.
The most common factors that courts consider in determining whether to pierce the corporate veil are:
whether the corporation or LLC engaged in fraudulent behavior
whether the corporation or LLC failed to follow corporate formalities
whether the corporation or LLC was inadequately capitalized (if the corporation never had enough funds to operate, it was not really a separate entity that could stand on its own), and
whether one person or a small group of closely related people were in complete control of the corporation or LLC.