A big concern for small business owners is (and if not, it should be) piercing the corporate veil. A main reason for forming a business as a corporation or limited liability company is to protect the personal assets of the business owners. In a corporation or LLC, the owners typically will not be personally liable for the debts or obligations of the company. However, in some situations, a court will determine that the owners are personally liable for the debts of the company. This is “piercing the corporate veil.” When a court pierces the corporate veil, the business owner’s home, bank accounts, and other assets may be tapped to satisfy the debts of the company.

The court determines whether it’s appropriate to pierce the corporate veil via a three-prong test.

The Three-Prong Test Includes:
  1. First, the court will look at the facts of the case to see if the company is the “alter ego” of the business owner. More on that later.
  2. Second, the court will consider if the business owners are using the limited liability of the company to defraud the otherwise legitimate claims of creditors. There’s a couple ways the court considers this. If the company borrowed money that the owner knew it probably wouldn’t be able to pay back. Also if they made business deals knowing that the company probably didn’t have enough money to pay for. Those are indicators to the court that piercing the corporate veil may be appropriate.
  3. Third, if it would be “inequitable,” to let the business owner get away with not paying its creditors. The court will be more inclined to pierce the corporate veil and hold the owner personally liable.

Let’s expand on the “alter ego” thing I mentioned. This episode of All Up In Yo’ Business further explains piercing the corporate veil and explains the “alter ego”.
Also, feel free to contact us today if you need help with your corporation. Be sure to subscribe to our YouTube channel for more All Up In Yo’ Business!
 Want to learn more about corporate veils? Check out: Undercapitalization and Piercing The Corporate Veil.

 

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  1. How Do I Contribute Money to My LLC? | The Law Office of Aiden H. Kramer, LLC - […] between you and your LLC which is so important to avoid the risks of the single-member LLC and piercing…
  2. Avoiding the Risks of a Single-Member LLC | Denver, Colorado Small Business and Estate Planning Attorney - […] is not meant to be an exhaustive explanation of the factors that go in to piercing the veil of…
  3. How to Pay Yourself in a Multi Member LLC - […] LLC adequately capitalized is something that will help protect you from a court one day deciding to pierce the…
  4. Sole Proprietor vs LLC vs Corporation - […] The LLC is the most popular entity formation and that is because (in Colorado, at least) an LLC is…
  5. Undercapitalization & Piercing the Corporate Veil - […] while ago, I posted a video about piercing the corporate veil and how it can be used to get…
  6. Using Personal Social Media to Promote Your Business - […] and marketing your business. If you’ve heard me talk about the risks of the single-member LLC and piercing the…
  7. Does My LLC Need an Operating Agreement? (Video) - […] protects the liability protection of the LLC. Having an Operating Agreement can be a vital factor when it comes…

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