Q: I’m a shareholder of this company, and a director and an officer. A vendor who I owe a lot of money to but I can’t pay is threatening to pierce the corporate veil. What does that mean, and what is the likelihood of success?
A: Piercing the corporate veil is the idea that for one or multiple reasons, the creditor is seeking to have the corporate or LLC shield from liability set aside.
So, how can that happen? The classic way that that can happen is that someone sets up a corporation or LLC, but then doesn’t really observe the separateness of that entity.
So, what do I mean by separateness? For instance, when you set up a business entity of any kind, you should immediately create a bank account in the name of the entity. All financial transactions related to the business should be run through the company bank account for the entity, and they should never be run through a personal bank account, and vice versa. Personal transactions should never be run through the company’s bank account because, what can happen is if an owner, particularly of a small company starts commingling personal and business transactions so that someone going through the records has a hard time distinguishing what’s a company expense and what’s a personal expense, this is one of the classic ways in which the corporate veil can be pierced and the individual shareholder can be held liable because a court can say, well, you mixed up these finances.
‘We can’t tell what the difference is between your personal expenses and your business expenses, and so we’re just going to hold you personally liable.’ What you want is a very strong separation between all business operations. And business income and business expenses should all be flowing through the business and the business account and should be kept clearly separated from personal expenses. That’s probably the single biggest cause for loss of the corporate form.