Piercing the corporate veil
A legal doctrine where courts disregard the entity's limited liability and hold owners personally liable for entity debts.
Definition
Piercing the corporate veil is a legal doctrine under which courts disregard the limited-liability protection of an LLC or corporation and hold the owners personally liable for entity obligations. Delaware courts apply veil-piercing narrowly and only in specific circumstances: undercapitalization at formation, commingling of personal and entity funds, fraud, ignored corporate formalities, or use of the entity as a mere instrumentality.
Context
Veil-piercing is rare in Delaware compared to some other states. Maintaining clean separation between personal and entity matters reduces veil-piercing risk substantially.
Example
A founder uses the LLC's bank account for personal expenses for years and never executes an Operating Agreement. A creditor sues and asks the court to pierce the veil. The court evaluates the pattern of disregard for entity formalities.
Common pitfalls
- Practical defenses: separate bank accounts, written Operating Agreement, formal records, capitalization adequate to business model, signing in entity name (not personal name).
- Single-member LLCs face slightly higher veil-piercing scrutiny in some jurisdictions.