How to Avoid Personal Liability for Your Corporation's Actions

(Page 2 of 2 of Personal Liability for Corporate Debt: Piercing the Corporate Veil)

By , Attorney · UC Law San Francisco

If you are a director, shareholder, or member of a corporation or LLC, take the following steps to ensure that a court won't pierce your corporate veil.

  • Comply with formal rules for forming and maintaining a corporation or LLC.
  • Maintain a separate bank account for the corporation or LLC.
  • Don't commingle personal assets with those of the corporation or LLC.
  • Don't divert corporate or LLC assets for personal use.
  • Make a reasonable initial investment in the corporation or LLC so that it is adequately capitalized.
  • Don't tell a creditor that you will personally guarantee payment of the corporation or LLC's debts.
  • Don't use the corporation or LLC to engage in illegal, fraudulent, or reckless acts.
  • Make sure the world knows it is dealing with a corporation or LLC by conspicuously identifying the company status (that is, "Inc." or "LLC") on all business cards, letters, quotes, invoices, statements, directory listings, advertisements, and all other forms of company communication. When signing company documents, clearly state your representative capacity (such as, "Jane Doe, President, Acme LLC.")

If you are sued personally for the debts of your business (a lawsuit names you and your business as defendants, or a creditor threatens to name you personally in a lawsuit), you may need the help of a business attorney to defend yourself. To find an experienced business litigation attorney in your area, go to Nolo's Lawyer Directory.

How to Pierce a Corporation or LLC's Veil

If you're on the other side of the fence, trying to collect from a defunct corporation or LLC on an unpaid debt or court judgment, you may be able to pierce the corporation or LLC's veil and obtain a court judgment against the owners of the company.

First, read the information above to see if the business from which you want to collect seems susceptible to getting its veil pierced. If it's a small business, you'll have an easier time of it. Many small businesses operate without sufficient funding and without following corporate or LLC formalities. When these businesses make deals that can be considered reckless or fraudulent, a court may lift their corporate veil so that the owners' personal assets can be taken.

Large corporations are not immune from losing their limited liability status either. Courts will often pierce the corporate veil of a large corporation when the officers or directors create a subsidiary corporation and transfer debts to that subsidiary. In one scheme, the owners of a large corporation incorporate several undercapitalized subsidiaries (companies that do not have enough money to support their operations). The large corporation (called the "parent corporation") finances the operations of and exerts control over the subsidiaries. Such subsidiaries are commonly called "dummy corporations" or "corporate shells."

When creditors seek to collect debts from or enforce a court judgment against a dummy corporation, they are often out of luck because the dummy corporation does not have sufficient assets to collect. In this situation, a court might pierce the corporate veil of the parent corporation, allowing the creditor to collect from the owners or members of the parent corporation. This prevents the creditor from suffering unjust cost.

Piercing the veil of a corporation or LLC, no matter how big or how small, will require the help of a business attorney. To find an attorney in your geographical area with experience in business litigation, go to Nolo's Lawyer Directory.

by: Craig T. Matthews, a business, employment, and litigation lawyer from the Dayton, OH area.

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