One of the benefits of starting a corporation or LLC is that the business entity protects the owner(s) from any personal liability. If the business fails, if it faces a major lawsuit or if it accrues substantial debt, the company and not the person who runs the business will be financially responsible.
While this system protects people from major losses and can help incentivize entrepreneurism, it sometimes leaves creditors in an unfair situation. People running a business might engage in fraudulent or illegal activity believing that they can avoid personal responsibility. They might then sell assets or declare bankruptcy for the business to avoid repaying those they owe.
Just because a business is the debtor doesn’t mean you have to give up on collecting a debt. Piercing the corporate veil can sometimes be a solution for creditors owed money by a corporation or LLC.
What does piercing the corporate veil involve?
The corporate veil is the thin layer of protection between the owners and operators of an incorporated business and the company’s liabilities. People need to maintain adequate corporate records, avoid misconduct and never commingle personal assets with business assets to maintain that separation between themselves and the company.
If they fail to do so or if they engage in certain forms of misconduct, the courts may agree to pierce the corporate veil in a civil lawsuit and hold the owner(s) of a corporation personally and financially responsible for the shortcomings of the business.
When you can’t collect from a company, you might be able to collect from the people who own or run the business in certain circumstances. Knowing about your collection options when a business owes you a debt can help you get the money you deserve.