One of the bigger advantages of forming a limited liability company is the protection it offers you from your LLC’s creditors. With few exceptions, your business’s creditors cannot go after your personal assets. That is, the extent of their recovery depends on your LLC’s wealth and not yours.
Sometimes, though, courts choose to pierce an LLC’s veil of limited liability. This means a court allows a creditor to go after your personal assets instead of only seeking compensation from your business’s resources. Here are some situations when a court may pierce your LLC’s corporate veil.
There is no meaningful difference between you and your LLC
To receive limited liability protection from your LLC, you must be personally separate from it. If there is no meaningful difference between you and your LLC, a court may decide you should be liable to your creditors. Keeping business matters separate from personal ones is a good way to establish a firm barrier.
You use your LLC to engage in bad acts
A court is not likely to award you for illegal or fraudulent behaviors. If you use your LLC to defraud creditors or for other wrongful reasons, a court may hold you personally responsible for damages. This approach comes from basic fairness.
You receive an unfair advantage
Often, courts consider whether someone has suffered undue harm because of an LLC’s conduct. If there is no difference between you and your LLC or you use your LLC to engage in bad acts, a court may choose to pierce the corporate veil to make your creditors whole. That is, a court is not likely to let you hide behind your LLC to gain an unfair advantage.
It is not usually difficult for LLC owners to maintain a strong corporate veil. Ultimately, by following LLC formalities and complying with the law, you significantly reduce your risk of losing your personal assets to your LLC’s creditors.