You had a great idea and created a business out of it! Congratulations! You took the initiative to form an entity, such as a corporation or limited liability company, to operate your business for a few good reasons. Not the least of which is to protect you, as a business owner, from being personally liable for the creditors of your business. So, you should be all set, right?
Maybe...., but maybe not. Ordinarily, owners of limited liability entities such as LLC's and corporations would not be personally liable for the debts of their business. Under the concept of "veil piercing," however, a creditor may hold owners (and perhaps other individuals involved in the business) personally liable for the debts of their business. To succeed in a veil piercing claim, the creditor must establish that the owner is using the business for personal rather than business purposes and, in many instances, to harm a third party.
The court relies on several factors to determine if the veil of limited liability should be pierced and they vary from state-to-state, but generally include: commingling funds between personal and business bank accounts and using business funds for personal obligations, undercapitalizing the entity, financing all business expenses by a parent entity, signing contracts and other obligations of the business in your individual capacity, and not maintaining certain business formalities, such as holding regular meetings of the owners, keeping and updating business records.
While a creditor bringing a veil piercing claim has a heavy burden of proof, do not solely rely on the formation of your entity to protect yourself from personal liability for your business' debts. Operate your business with the factors mentioned above in mind and give us a call if you have any questions.