Corporations and LLCs are entities that are separate from their creators. They have legal rights and can own property. They can also be parties to contracts. When corporations and LLCs acts prudently and observe corporate formalities the owner’s personal assets are protected. A judgment collector can only pursue the assets of the corporation.
Often a judgment against a corporation is difficult to collect because the corporation does not have sufficient assets to satisfy the judgment. In other cases the corporation may avail itself of the protections afforded by bankruptcy law. That’s why plaintiff lawyers generally look for ways to pierce the corporate veil. An aggrieved party can sometimes make successful arguments that the corporate veil of their adversary should be judicially pierced.
Parties tend to want to settle when they’re personally on the hook. The white flag often comes out when the defendant has personal exposure. Savvy negotiators will ask owners of corporations to personally guarantee contracts. This way if there’s a breach, and resulting damages, the winner of a lawsuit can execute on the personal assets of the owners. Executing on assets involves the forced transfer of property through a judicial process.
Sometimes a claiming party, without a personal guarantee, can use litigation to pierce the corporate veil. When a court declares that the liability shield of a corporate entity is compromised the adverse party may suddenly be in the mood to talk settlement to end the lawsuit before trial.
In some situations veil piercing can be accomplished with litigation if the plaintiff can establish the corporation of LLC is the mere “alter-ego” of its owners. Undercapitalization of a corporation or LLC can be another basis for piercing the corporate veil. The failure to observe corporate formalities can also result in veil piercing. Additionally, the corporate veil can be pierced in situations where the plaintiff can meet the elevated evidentiary standard in proving fraud.
1Source Law recommends asking for personal guarantees in contracts where practical. If your asked to provide a personal guarantee be sure you understand the personal consequences. If there’s been a breach of contract, and litigation seems necessary, there may be ways of piercing the corporate veil through the judicial process. Often the threat of personal liability is enough to motivate a defendant to settle a valid claim.
Attorney at Law