What does it mean to pierce the corporate veil?

Many times, a creditor will ask a court to ignore the liability protection offered by the corporation or LLC status of a business. In doing so, the creditor is asking the court to pierce the corporate veil and make the business owners personally liable for the debts, liabilities and obligations of the business itself (which they generally would not be liable for, due to the limited liability protection afforded to corporations and LLCs). This is generally a remedy which the court will consider where the owners of the company in question used their business to defraud the business creditors, or do some other wrongful and illegal act.

This sometimes occurs, for example, where owners are using the business as a shell and a court determines that the business is really just an alter ego of the owners (this is known as alter ego liability, and while there are some technical differences, it boils down to basically the same thing as piercing the corporate veil). Courts are also willing to pierce the corporate veil where not doing so would lead to some type of fraud or injustice. The main idea here is that owners who abuse the company entity in some way which harms others will find themselves personally liable. For example, if a corporation takes on immense debt that far exceeds its assets, so that it’s obvious from the start that the business could never hope to repay these debts, the court may pierce the corporate veil so that the creditors are not unjustly out-of- pocket for all of the money they loaned.

The precise factors that a court looks at in determining whether to pierce the corporate veil very from state to state, as each state has developed its own test and standards.