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Being named in a lawsuit can be very confusing and stressful. Many people wonder if a lawsuit will affect their personal assets. It can be particularly confusing if you have been named in a lawsuit for a debt owed or action taken solely by your business.  Here are several terms you need to understand and a brief explanation of what must be proven to be able to hold a business owner responsible for their business’ debt or action.

Veil Piercing: Also known as “piercing the corporate veil.” It refers to a situation in which courts put aside limited liability that is normally afforded members of an LLC or shareholders of a corporation and hold them personally liable for the corporation’s actions or debts. In order to ‘pierce the corporate veil,’ the court must find the following:

  1. Failure to adhere to Corporate Formalities: Refers to the legal steps and precautions that a business must follow in order to meet operational requirements. This, in turn, will allow it to maintain the corporate protections it enjoys. Such formalities include documenting annual meetings with members or shareholders and documenting special meetings of members or shareholders when the business wants to take a major action, such as borrowing money or selling a major asset.
  2. Commingling Funds: Refers to the mixing of the owners’ personal funds with the business’ funds, such as having the business pay for something that is considered a personal expense and not accounting for that appropriately.
  3. Bad Faith or Improper Purpose. Lastly, the court must find that the business owners did items #1 and #2 for an illegal or improper reason, such as attempting to avoid paying a creditor.

The legal theories and concepts behind Veil Piercing are quite dense and complicated. If you aren’t sure that you are avoiding personal liability for your business or have questions about lawsuits, please contact us. It’s important to protect your personal assets.

Please reach out to us at A Business Law Firm, LLC in Spartanburg, South Carolina, at 864-699-9801 so we can make sure that those are being protected.