A corporation is supposed to shield you from personal liability for what the business does. But courts can pierce the corporate veil and hold you personally responsible when specific factors are present: fraud, ignoring corporate formalities, undercapitalization, or intermingling personal and business assets. Here’s what each of those actually means.
- What Is the Corporate Veil?
- Risk-Factor Assessment Tool
- What Does It Mean to "Pierce" the Corporate Veil?
- Factor 1: Using the Company to Commit Fraud
- Factor 2: Failing to Observe Corporate Formalities
- Factor 3: Undercapitalization and Under-Insurance
- Factor 4: Intermingling Personal and Business Assets
- Common Ownership and the Single Entity / Enterprise Theory
- Piercing the Corporate Veil FAQ
- What is the corporate veil?
- What does it mean to pierce the corporate veil?
- What factors do courts look at when deciding whether to pierce the corporate veil?
- Can I be held personally liable if my company is sued?
- What counts as intermingling personal and business assets?
- What is undercapitalization?
- What is the single entity or enterprise theory in Pennsylvania?
- Do I need to worry about this if my business looks legitimate?
- Talk to Kaminsky Law
- Related Reading
What Is the Corporate Veil?
A corporation is typically the way people insulate themselves from personal liability. If your company gets sued for something it did, a contractor’s negligent install, a business’s breach of contract, it’s normally the corporation itself that can be held liable, not you personally.
As a shareholder or member, you generally shouldn’t be held personally liable for the corporation’s acts when you’re acting in the company’s interest and haven’t done anything wrong.
Risk-Factor Assessment Tool
Where Are Your Risk Areas?
Check anything that applies to your business to see, in general terms, which corporate veil factors it touches on. Courts weigh these together, not as a single pass/fail test.
Disclaimer: Attorney Advertising. This tool is general information, not legal advice, and does not create an attorney client relationship. It cannot decide whether a court would pierce your company’s veil, because courts weigh these factors together rather than treating any one as decisive. Pennsylvania only. For advice about your situation, contact Kaminsky Law.
What Does It Mean to “Pierce” the Corporate Veil?
In some instances, a person can be held personally liable for something the company did. That’s what “piercing the corporate veil” means.
When a court decides whether to pierce the veil, it looks at several factors and weighs them together. Usually no single factor decides it alone.
Pennsylvania courts maintain a strong presumption against piercing the corporate veil, recognizing and upholding corporate structures unless unusual circumstances justify an exception. That’s a high bar, and courts rarely pierce the veil without specific, compelling reasons.
Factor 1: Using the Company to Commit Fraud
One factor, usually the easiest basis for piercing the corporate veil, is using the corporate entity to commit fraud against someone, meaning the fraud is carried out on behalf of the company rather than personally.
For example, consider a contractor who agrees to install 50 windows for a customer for $50,000, with $25,000 paid upfront to cover materials. Instead of buying the windows, the contractor gambles the deposit away and keeps delaying the customer. Because the money went to the contractor’s company rather than to the contractor personally, using the corporate form to carry out that fraud is the kind of conduct that can lead a court to hold the individual personally liable, not just the company.
This distinction matters most when the company itself can’t pay a judgment. An individual harmed this way would want to pierce the veil and go after the person personally, partly to have a way to recover money if the company is bankrupt. If that person collected $25,000 from twenty different customers the same way and used it to buy a house or a car personally, while the company itself is bankrupt, suing only the company wouldn’t be enough to recover anything.
Factor 2: Failing to Observe Corporate Formalities
Another factor a court looks at is whether the company observes corporate formalities. Everybody who opens a company files incorporation documents with the state, that part alone isn’t the real question.
Corporate formalities go further: does the company have an operating agreement? If there are other shareholders, have there been meetings, and are there meeting minutes? Are there by-laws? Have company decisions actually been made in writing?
If a company exists but doesn’t observe those formalities, that might tell a court the owners aren’t really treating it as a separate company, or aren’t serious about being one. The reasoning follows from there: if you’re not upholding corporate formalities, the argument is you shouldn’t get the benefit of limited liability either. Observing those formalities is part of what creates that protection in the first place.
Factor 3: Undercapitalization and Under-Insurance
Another factor is undercapitalization, meaning the company doesn’t have enough assets to support its liabilities. Having debt is standard for a person or a company. The real question is whether that debt is managed properly and whether there’s adequate insurance.
Take a taxi cab company as an example. Say a taxi cab carries only the state’s minimum required insurance, $15,000, and an injury from an accident is worth a lot more than that. You could sue the driver, the company, or the cab itself, and be told that’s all the insurance there is. It turns out the taxi cab operates under its own single-purpose LLC, formed just to hold one taxi medallion, with a mortgage on that medallion and no other assets, just that liability and the minimum coverage.
In a situation like that, one option is to pursue the parent company, arguing it purposefully created multiple single-purpose entities that share a common purpose specifically to keep each one undercapitalized and minimally insured.
Factor 4: Intermingling Personal and Business Assets
Another major factor, and a common one, is intermingling company assets with personal assets, sometimes described as using the company account as a personal piggy bank.
Relevant questions include: does the company have its own bank account, or do checks made out to the company go into a personal account instead? Are checks made out to the company, or to the person personally? If a personal mortgage is being paid out of the company bank account, a court may not want to treat the company as truly separate.
Here’s a common version of this: three shareholders in a business decide to run personal expenses through the business instead of paying themselves and covering those separately, things like a car payment, a cell phone bill, a mortgage, or personal taxes. Whether that’s proper depends on how it’s reported; that’s a question for an accountant, not something this covers as legal or accounting advice. Some of those expenses might be legitimate business expenses on their own. The problem is a pattern: mortgage payments, real estate taxes, another company’s taxes, a car, a phone, furniture, a party, even a ski trip, all run through the business account.
If that business later gets sued and it turns out the business doesn’t have any money, or it has to declare bankruptcy because it can’t pay a judgment, it’s reasonable for someone to argue the shareholders intermingled personal and business assets, and that money should come back into the company to help pay the judgment. That’s true even for a company that otherwise looks like it’s operating the same as everybody else.
Assets can also be intermingled through a chain of companies. This shows up a lot with construction companies or contractors: one company buys the building, another does the work on it, another subcontracts or sells it, another leases it, and another manages it, five or six companies effectively doing the job of one. If it turns out one of those companies has been intermingling assets with another, it’s not unreasonable to argue they’re all really one company and should be held liable together.
And if you’re on the other side of it, operating a few different companies based on an accountant’s suggestion, meeting with an attorney to get real professional advice on how to properly separate those companies, assets, and liabilities is worth doing before that becomes a problem.
Common Ownership and the Single Entity / Enterprise Theory
A similar pattern shows up in real estate: one company owns 20 different properties, each held under its own separate LLC, with all of them paying into one management company. If something happens at one of those properties, that individual LLC might carry only minimal insurance, or none at all.
There may be an argument to pierce the veil of the whole structure in a case like that: that the company purposefully created a separate LLC for every property, with a management or holding company that pulls the money out of each one, so that if any single LLC gets sued, there’s nothing left in it to collect. If those LLCs and the management company share common ownership, the same owners, the same managers, the same people involved, there’s an argument that they’re really all one company and the separateness is a façade.
These aren’t easy arguments to make, but they can be made when a company is undercapitalized or inadequately insured. The 2021 Pennsylvania Supreme Court case Mortimer v. McCool, 255 A.3d 261 (Pa. 2021), addresses this directly under what’s called the single entity or enterprise theory: it allows an injured party to hold sister or affiliate entities liable when they have common ownership and mingled operations.
Piercing the Corporate Veil FAQ
What is the corporate veil?
The corporate veil is the legal protection that separates a company from its owners. A corporation is typically the way people insulate themselves from personal liability, so if the company is sued for something it did, a negligent install, a breach of contract, it’s normally the corporation itself that’s held liable, not the individual owner or shareholder.
What does it mean to pierce the corporate veil?
It means a court holds an owner personally liable for something the company did, instead of limiting liability to the company itself. Courts weigh several factors together rather than relying on any one alone, and Pennsylvania courts start from a strong presumption against piercing the veil, so it takes specific, compelling reasons.
What factors do courts look at when deciding whether to pierce the corporate veil?
Courts generally look at whether the company was used to commit fraud, whether it observed corporate formalities like meetings and an operating agreement, whether it was undercapitalized or under-insured, and whether personal and business assets were intermingled. No single factor usually decides it alone; courts weigh them together.
Can I be held personally liable if my company is sued?
Generally, no, the corporation itself is normally the one held liable, not you personally, as long as you’re acting in the company’s interest and haven’t done anything wrong. That protection can break down, though, if a court finds grounds to pierce the corporate veil, for example fraud, ignoring corporate formalities, undercapitalization, or intermingling personal and business funds.
What counts as intermingling personal and business assets?
Running personal expenses, a mortgage, a car payment, personal taxes, through the company’s bank account instead of keeping them separate. It also includes not having a separate company bank account, or paying yourself in a way that blurs which money belongs to the business and which belongs to you personally. A pattern of this, not a single expense, is usually what raises concern.
What is undercapitalization?
Undercapitalization means a company doesn’t have enough assets to support its liabilities, often paired with inadequate insurance for the risks the business actually faces. Having debt on its own isn’t the problem; the question is whether that debt and risk are managed properly.
What is the single entity or enterprise theory in Pennsylvania?
It’s the theory behind Mortimer v. McCool, 255 A.3d 261 (Pa. 2021), which lets an injured party hold sister or affiliate entities liable when they share common ownership and mingled operations. It applies when a company is deliberately split into several LLCs with the same owners and managers, structured so that if one gets sued, there’s nothing left in it to collect.
Do I need to worry about this if my business looks legitimate?
These issues can come up even for a company that otherwise looks like it’s operating the same as everybody else. The cases tend to be very fact intensive, so it’s worth understanding where the actual risk areas are rather than assuming that looking normal on the outside is enough protection on its own.
Talk to Kaminsky Law
These cases are very fact intensive, and it’s hard to say how a specific case will go without hearing all the facts. If someone used the corporate form to commit fraud against you, or you’re a business owner who wants to make sure you’re protected, Kaminsky Law is happy to talk through it. Consultations are always free, and the goal is to help you avoid these disputes in the first place, or get you out of one you’re already in.
Related Reading
- Types of Business Entities in Pennsylvania
- Legal Essentials for Your Small Business
- Breaking News: US Supreme Court Rules Companies Can Be Sued Wherever They Are Registered
This article is general information based on recorded discussions. It is not legal advice and does not create an attorney client relationship. Every case is different. Prior results do not guarantee a similar outcome. For advice about your situation, contact Kaminsky Law directly.
