What is piercing the corporate veil?

As a general rule, creditors of a corporation (or LLC) may not proceed against the assets of any stockholders of the corporation or LLC. However, specific circumstances may permit such creditors to “pierce the corporate veil” to satisfy corporate obligations by levying against assets of the stockholders or members.

The cases where stockholders or members have had personal liability generally have permitted the corporate veil to be pierced when fraud or similar malfeasance has occurred, and where it would be manifestly unfair to allow a stockholder or LLC member not to be responsible for the debts of their corporation/LLC.

Thus, it is important to note that mere incorporating does not automatically prevent creditors of the corporation from reaching the assets of the corporation’s stockholders.

The following are among the facts that courts have relied on in allowing the corporate veil to be pierced:

• disregard of corporate formalities;
• co-mingling of personal and corporate assets or diversion of corporate assets to personal use;
• “holding out” to creditors by a stockholder that the stockholder is the obligor;
• inadequate capitalization of the corporation; and
• manipulation of corporate assets and liabilities by the stockholder.