I think I pierced my Corporate Veil – Is this Fatal?

Don’t go to the emergency room yet.  Your awareness of something going awry in your corporation maybe the first step to recovery.

First off, you can’t really "pierce" your own corporate veil.  "Piercing the corporate veil" is lawyer talk for somebody else trying to make you personally liable for your corporation’s debt.

Usually a corporation protects you from the corporation’s creditors.  The corporation is considered a separate entity.  If the corporation enters into a contract, only the corporation is liable, not you personally, even if you are the sole shareholder, director and officer of the corporation.

Now, this corporate separateness can sometimes lead to injustices.  For this reason, courts came up with the "piercing the corporate veil" doctrine that says if someone really abuses and disrespects the corporate form to screw creditors, he or she might not be able to prevent personal liability, if the creditor can show facts and circumstances that fulfill the "piercing the corporate veil" doctrine.

Very generally speaking, a corporate veil will stay intact, if the corporation complies with all corporate formalities, if the corporation is kept sufficiently distinct from the shareholders (no intermingling of funds and assets) and if the corporation is not just a plot to defraud creditors. 

Most likely, one small incident of non-compliance with corporate formalities or accidental co-mingling of personal funds with business funds if corrected in due course is unlikely to be enough to be the basis of a piercing the corporate veil claim and you should not loose sleep over it if it happened.

However, it should not happen in the first place and be avoided at all cost in order to prevent any potential claims.  Do not pay business expenses from your personal account, do not pay personal expenses with business funds; do not neglect to record corporate resolutions and meetings; do not forget to issue shares properly; do put adequate capital into your corporation; do not hide behind the corporate entity for your own personal shady dealings.  If you are a one person corporation, the formalities and separateness may seem artificial, but you have to get used to it, in order to protect your corporation’s liability shield.

If in doubt what is and isn’t o.k. under the doctrine, check with an attorney. 

**This post is for informational purposes only and does not constitute legal advice**

About Imke Ratschko


Imke Ratschko is a New York Attorney helping small businesses, business owners and entrepreneurs with all things "Small Business Law," such as litigation, contracts, business owner disputes, shareholder and operating agreements, sale or purchase of a business, investors, and starting a business. You can reach her at 212.253.1027 or by email.