A Corporate Veil is a term used to describe the protection an individual enjoys under their Corporation or LLC. The owner of a Corporation or LLC is protected from personal liability for debts incurred by the company. It also protects them from any legal obligations of the company. In other words, a person owning a Corporation or LLC cannot be held responsible personally for any debts or legal obligations. Their own personal assets are protected from any action being taken against them. It separates the person from the company and creates a ‘Veil’ of protection. The main benefit of a Corporate Veil is that it insulates individuals from risk while encouraging business development. It is important to note however that a Corporate Veil is not impenetrable and there are circumstances in which the Veil may be ‘pierced’.
Piercing the Corporate Veil describes the action of the courts when the Corporate Veil is not upheld because the owner failed to preserve Corporate formalities and demonstrate personal and corporate separateness. Because the Corporation is considered its own entity, action taken due to debt or other legal obligations are applied to the business, not the owner. However, the company cannot think for itself or make its own decisions. Therefore, if it is determined that the business of the company’s owner did not uphold the laws and provisions of Corporate ownership, or if the Corporation or LLC was a front for committing illegal activities, the Corporate Veil can be pierced and the shareholders and owner can still be held liable.
We encourage you to learn more about forming a business properly, preserving corporate formalities, and meeting ongoing compliance requirements. The best way to do that is to review our Business Formation System, or schedule a phone call with one of our experts!