Will Your Veil Be Pierced? How Strong is Your Entity’s Liability Shield? — Piercing the Veil, Alter Ego, and Other Bases for Holding an Owner Liable for Debts of an Entity

Abstract

Courts, commentators, and attorneys describe corporations and limited liability companies as limited liability entities, but limited liability is not always the end result. While debts of a separate legal entity ordinarily would not be considered those of the owners even if the statutes applicable to these entities did not contain limitations on the owners of the entities, exceptions exist. For example, courts developed piercing the veil in corporate cases over a century ago as an equitable remedy to prevent perceived misuses of the corporate form. In the corporate context, courts may pierce the veil where a subsidiary corporation is merely an alter ego or agent of the corporate parent, where the corporation is merely the alter ego of the shareholder, or where the corporate shield is being used to defraud creditors. Courts have extended veil piercing to LLCs — sometimes with regard to their differences and sometimes not.An owner of an entity may also incur direct liability for debts of the entity or otherwise become liable on grounds other than veil-piercing or alter ego. These grounds include acting in the name of an unformed entity, acting for an undisclosed principal, liability to return improper distributions, liability for unpaid taxes, direct liability imposed by other federal and state statutes, and liability for one’s own actions and the actions of agents.This Article examines the statutory and case law and other commentary in these areas, makes suggestions and criticism, and offers recommendations.