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Most business organizations are considered to be completely separate legal entities from its owners or shareholders. This separation creates a shield that protects people from the debts, liabilities, and obligations the company might incur. However, as many business law attorneys know, this separation is not absolute. In some cases, creditors may persuade courts to “pierce the corporate veil,” which refers to a process that makes business owners legally responsible for the debts incurred by their business.

attorneyIn general, courts will consider piercing the corporate veil when the debts and obligations of a company were incurred fraudulently, or through the commission of another illegal act. For example, if the business is only a shell for the actions of the owners, essentially being used as an alter ego. In this instance, the owners may be exposed to “alter ego liability,” in which the court decides the business was never treated as a separate entity, especially if they did not closely follow legal forms or they intermingled personal and corporate finances.

Courts are also willing to pierce the corporate veil when leaving it intact would lead to an injustice or some form of fraud against others. If, for example, a business took out more credit than it was worth, the court could reasonably assume that the owners never intended to pay back their creditors. Corporate liability limitations exist to provide business owners enough protection to take acceptable risks, not defraud lenders, vendors, or investors.

The rules determining whether a court will decide to pierce the corporate veil vary dramatically from one state to the next, so speak with a local attorney to learn more about the standards in your area.

 

Since 1946, the business law attorneys at Zangari Cohn Cuthbertson P.C. have provided highly effective legal representation to locals throughout New Haven, CT. They work to help clients achieve successful resolutions to their legal situations, such as civil disputes and estate planning, in a manner that is both reliable and affordable. Visit their website to learn more today, or call (203) 789-­0001 for a consultation today.

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