Associate Attorney
One of the biggest benefits of incorporation is that it limits the personal liability of the business’s owners. Yet, in narrow circumstances, individuals may enforce a business’s liability against its owners by piercing the corporate veil to reach the individuals behind the corporate structure.
At Woods Lonergan PLLC, our New York City business litigation attorneys prioritize protecting businesses and the people behind them. Through decades of experience, we have gained the knowledge and understanding to guide clients through complex business and legal matters—including defending against attempts to pierce the corporate veil and impose personal liability on business owners.
Learn how our legal team can help you by calling (212) 684-2500 or filling out our online form today.
What Is the Corporate Veil?
The corporate veil is the structural separation between a corporate entity’s owners and the entity itself.
It protects the individual’s assets from liability for actions taken by entities like:
- C corporations,
- S corporations, and
- Limited liability companies (LLCs).
In simplified terms, what is the corporate veil? The corporate veil is a barrier that protects the corporation or LLC owner’s personal assets. Because of the veil, people cannot recover damages from an owner’s personal assets for harm caused by the business. When someone pierces the corporate veil, they reach through that protective barrier.
What Does It Mean to Pierce the Corporate Veil?
Piercing the corporate veil means holding a business owner personally liable for their business’s actions. The process begins with someone (the plaintiff) suing the business. If the business does not have enough assets to cover the damages the plaintiff requests, the plaintiff may attempt to pierce the corporate veil.
To do so, the plaintiff must convince the judge that the circumstances make piercing the corporate veil legally appropriate based on factors established by law. If the court finds piercing the veil is appropriate, it disregards the separation between the individual and the business entity and allows the plaintiff to recover damages out of the owner’s personal assets.
A harmed individual can pierce the corporate veil only when someone misuses the corporate structure for personal benefit.
Specifically, someone may pierce the corporate veil if:
- They have experienced a legal harm (injury),
- The corporation caused the injury,
- Certain corporate owners exercised complete control over the corporation, and
- That control caused the injury.
The degree of control the owners must exercise is typically high. The plaintiff has to show that the owner functionally used the corporation as an alter ego.
Piercing the Corporate Veil Factors
Generally, New York courts avoid authorizing the piercing of the corporate veil unless the plaintiff demonstrates that their legal claim involves some type of fraud and exceptional circumstances. In New York, courts consider the following piercing the corporate veil factors:
- Whether and to what level the business adheres to corporate formalities,
- Whether the business has adequate funding,
- Whether corporate officers commingle corporate and personal assets,
- Whether property and equipment are shared,
- Whether one person or a small group has complete control of the entity, and
- Whether the alleged wrongdoer used corporate funds for personal benefit.
Courts are mindful that closely held corporations typically adhere less stringently to corporate formalities and adjust their analysis accordingly.
Who Can Pierce the Corporate Veil
Only people with legal claims against the company can usually pierce the corporate veil.
Individuals and entities that may have legal claims against the company include:
- Creditors,
- Shareholders,
- Business partners,
- Current or former owners, and
- Customers.
In short, anyone who wants to pierce the corporate veil must have a claim against the business.
Business Alter Egos
An alter ego is a legal concept used in piercing the corporate veil claims. To be treated as a business’s alter ego, the owner must be so closely intertwined with the business that they are indistinguishable for legal purposes.
Factors that affect whether a business is functionally its owner’s alter ego include whether the owner:
- Exercises nearly exclusive or fully exclusive control over the company;
- Has commingled personal and corporate funds;
- Disregards basic corporate formalities like keeping separate accounts, holding meetings, and maintaining proper records; or
- Inadequately funded the business so that it cannot meet its financial obligations.
If these factors are present, courts may conclude that the business is its owner’s alter ego, potentially allowing plaintiffs to pierce the corporate veil.
Notably, some businesses run higher risks of piercing the corporate veil:
- Closely held businesses have few owners and often involve family members or friends, who may treat the business more casually;
- Startups can run risks related to inefficient structures and the possibility of undercapitalization; and
- Industries that involve large or otherwise significant transactions, like construction, real estate, and finance, are at particular risk of disputes with creditors.
However, all these businesses can reduce or eliminate those risks by following several best practices.
Best Practices to Reduce the Risk of Piercing the Corporate Veil
Common mistakes that may lead to veil piercing include:
- Moving funds back and forth between business and personal accounts frequently,
- Failing to record reasons for fund transfers as part of the transfer,
- Failing to hold meetings or record details about important business transactions,
- Keeping funds in personal accounts until they are needed by the business, and
- Using business accounts for personal reasons.
Thankfully, careful planning can help you avoid those risks and protect your assets.
To minimize or eliminate the risks associated with piercing the corporate veil, consider taking the following steps:
- Hold meetings and keep minutes, even if you address few topics at a time;
- Keep personal and business accounts separate;
- Do not transfer funds into or out of business accounts unless you record the transaction;
- Purchase and maintain insurance; and
- Ensure adequate capitalization by estimating costs, income, and available resources in specific detail and regularly updating your estimates based on the business’s performance and other developments.
To ensure all owners are on the same page, work with an experienced lawyer to create a written policy that you can consult at any time.
What Are Some Examples of Piercing the Corporate Veil?
First, consider an example of a business using business Funds for personal expenses.
An owner of a restaurant used company money to pay for personal vacations. The court pierced the veil because the business was treated as the owner’s personal account.
Second, consider an issue where a business commingled personal and business assets.
An entrepreneur used his personal bank account for business expenses, which led the court to pierce the veil and hold him personally liable for the business’s debts.
Corporate Veil Liability
Whether someone can pierce the corporate veil depends on the specific facts and circumstances. The attorneys of Woods Lonergan PLLC have vast experience in cases that include issues of piercing the corporate veil.
We understand your concerns in this area, and we can put our extensive knowledge to use to help you protect the company you’ve worked so hard to build. Give us a call at (212) 684-2500 or send an online message today for assistance.
Woods Lonergan PLLC represents business owners in piercing the veil claims throughout New York, including Manhattan, Brooklyn, Queens, Bronx, Staten Island, Nassau, Suffolk, and Westchester Counties.
Resources:
Conason v. Megan Holding, LLC, 29 N.E.3d 215 (N.Y. 2015), link.
Shisgal v. Brown, 21 A.D.3d 845 (N.Y. App. Div. 2005), link.
ABN AMRO Bank, N.V. v. MBIA Inc., 952 N.E.2d 463 (N.Y. 2011), link.
Manichaean Capital, LLC v. Exela Techs., 251 A.3d 694 (Del. Ch. 2021), link.
Compagnie Des Grands Hotels D’afrique v.Starwood Capital Grp. Glob. I, No. 23-2631 (3d Cir. Sep. 20, 2024), link.