New York LLC
Piercing the corporate veil is a legal concept that allows individuals to hold the owners or shareholders of a corporation personally liable for the corporation's debts or actions when they have improperly commingled personal and corporate assets, or used the corporate structure to commit fraud or injustice.
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Last Updated: March 27, 2026
Piercing the corporate veil — that’s a scary phrase to a business owner. After all, most entrepreneurs create a corporation or LLC because the business entity helps protect them from personal liability. And if that protection is compromised, what then?
While piercing the veil sounds like — and is — a serious issue, it’s one a business owner can usually avoid. This guide covers the basics of the corporate veil, including what it is, how to pierce it, and how an owner can protect their business’s limited personal liability.
“Piercing the corporate veil” is a term used to describe the scenario when a court rules that a plaintiff can go after the personal assets of the owner(s) of a limited liability company or corporation (see limited liability company definition). Ordinarily, this doesn’t happen; creditors can usually only come after the assets of the business itself because the corporate veil protects the business owners.
But in some circumstances, a court may rule to pierce the corporate veil so a plaintiff can seize assets from the business owners’ personal assets. This could include the owner’s personal savings, home, vehicle, etc. This scenario primarily occurs because the business entity broke or ignored state statutes in some way.
If an entrepreneur just starts a business on their own (or with a friend) without filing any paperwork, they’re operating as a sole proprietorship (Please see: What is a Sole Proprietorship or business partnership definition for more information). These are legitimate business types, but they don’t have a corporate veil or personal asset protection. If the business gets into legal trouble, a creditor could seize the owner’s personal belongings to pay the debts.
In contrast, a business structure registered with the state, like an LLC, which has “limited liability” in its name, has a corporate veil. Its owners are usually shielded from liability because the business is a separate legal entity. Corporations also offer this protection. It’s one of the primary reasons some small business owners decide to incorporate.
Every state has its own specific guidelines for businesses, so each state also has different court proceedings for business lawsuits. This guide can’t cover every single state, but here are a few notable examples.
In general, a court will only rule to pierce a corporate veil if the business owner(s) perpetrated some kind of legal error. But every state has different criteria for what constitutes “sufficient cause” for corporate veil piercing.
If an entrepreneur is unsure how their state treats questions about the corporate veil, it’s highly recommended to consult with a local business attorney for the specifics of their jurisdiction.
While each state treats these cases a bit differently, there are some common reasons that an LLC’s veil might be pierced.
If an LLC commits fraud of any kind — an investment scam, a credit card fee scam, a pyramid scheme, or something else — the corporate veil will most likely be pierced. For example, let’s say a ticket company promises it has 1,000 tickets to the most popular concert in the area. In reality, it only has 900 tickets, but it takes payment from 1,000 customers.
That’s a very simplistic scenario, but fraudulent business activities like this happen. And a court could rule for the LLC’s members to pay up if the LLC itself couldn’t pay back the ticket money.
In some cases, a business owner will use their LLC as an “alter ego” for their own personal activities. If this happens, a court may rule that the LLC is a sham and completely indistinguishable from the person who owns it. And in turn, the owner has to pay up.
Intentionally or not, a business owner might use their LLC’s bank account to pay a personal bill. Or maybe they’ll pay a company debt using their personal bank account. An entrepreneur with multiple LLCs might accidentally send funds from Business A to Business B’s account. Often, these mistakes are innocent and isolated incidents, and they can be corrected.
But repeatedly mingling business funds with personal funds (or those of other businesses the entrepreneur owns) is not an innocent mistake. And courts often rule that this irresponsible mixing of accounts is sufficient cause to pierce the corporate veil.
Undercapitalization occurs when an LLC commences business without sufficient capital to conduct its normal business operations and pay creditors. It’s a common problem for small businesses who don’t properly estimate their business expenses and projected revenue.
In a worst-case scenario, a creditor’s lawyer might be able to prove that an entrepreneur knowingly started with insufficient capital. In these cases, a court might rule that the veil should be pierced.
If a court rules that an LLC’s corporate veil can be pierced, the consequences can be pretty severe. The members become personally liable for the outstanding debts of the LLC. Depending on the personal liability protection provisions set out in the LLC’s operating agreement, one or all of the members will be liable.
A pierced corporate veil also means there’s a loss of limited liability protection. Any of the owner’s personal assets can be confiscated to pay off their debt. For example, if a defendant doesn’t have enough money in their bank account to pay the court settlement, a creditor could come after their home or their car to make up the difference.
Depending on the circumstance, a business owner might face additional legal and financial consequences. They might lose industry licenses, or they could have a difficult time getting loans from financial institutions in the future.
Thankfully, it’s possible to avoid having a business’s corporate veil pierced. To put it briefly: if someone runs a compliant, legal LLC, they’ll likely enjoy personal asset protection. But here are some key focus areas to stay compliant.
Each state has slightly different annual requirements for an LLC, but it’s important that a business adheres to them. That might entail filing an annual report, maintaining a state business license, or creating and following an operating agreement. Be sure to know and follow all of the state’s LLC requirements.
A business owner should do their due diligence to start their business with adequate capital to succeed. While it’s impossible to predict every single expense a new business will incur, an entrepreneur should be able to budget responsibly.
Additionally, make sure the business maintains adequate capitalization by making distributions only when appropriate. Basically, an owner shouldn’t pay themselves from their LLC until the LLC has paid its own bills.
Even though an LLC doesn’t have the same record-keeping requirements as a corporation, it still needs to keep detailed records. For example, the LLC should keep tax records, a copy of its operating agreement, records of filed annual reports, proof of the distributions it’s made, and more. These records help establish proof that a business owner has properly maintained their LLC and operated as a compliant business.
Banks are usually reluctant to give loans to new businesses, so they’re likely to ask an owner to make a personal guarantee on a loan before approving it. That simply means that, if the business defaults on the loan, the owner is expected to pay it back with their personal funds. In a case like that, the corporate veil won’t protect a business owner because they’ve entered into an agreement to repay the loan themselves.
By the same token, remember to sign any contracts for the business as a representative of the LLC, not as an individual.
If in doubt, get the help of a business lawyer to answer any business questions. Even though hiring an attorney might seem expensive up front, their expertise can help a business owner avoid thousands in lawsuits down the road. As they say, better safe than sorry.
Protecting a business’s corporate veil requires running a perfectly compliant business. ZenBusiness can help entrepreneurs achieve that. Whether a business needs an Employer Identification Number (EIN) to get a business bank account, a registered agent for service of process, or an easy way to manage business finances, ZenBusiness has it covered.
To pierce a corporate veil, a plaintiff must take a business to court. The court will decide whether or not the veil can be pierced. If the veil is pierced, the owners of the defendant business will be held liable for the settlement amount.
Piercing the veil is important because the veil is what separates the business from its owners. As long as the corporate veil is maintained — the business is run appropriately — the personal assets of the business owners cannot be taken to pay business debts. That changes when a court rules that the corporate veil has been pierced.
That ultimately depends on what state a business is in, as every state has slightly different rules for what’s sufficient cause to pierce the veil. That said, in many states, a business must demonstrate extreme disregard for legal business formalities to have its veil pierced.
It’s absolutely essential to get a business checking account for an LLC. This will likely require an Employer Identification Number (EIN).
Once the account is set up, a business owner should have a strategy in place to keep themselves from using their business bank account to pay for personal expenses by accident. Some entrepreneurs use a different bank for their personal accounts. Exactly how an entrepreneur keeps the accounts separate doesn’t matter; keeping the funds separate is crucial.
ZenBusiness is a financial technology company and is not a bank. Banking services provided by Thread Bank, Member FDIC.
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Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. For specific questions about any of these topics, seek the counsel of a licensed professional.
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