Piercing The Corporate Veil: Remove Liability Limits (2026)

What the Corporate Veil Is

State laws create a wall to separate LLC and personal assets and liabilities. This wall means that, normally, company creditors and claimants can only pursue company assets and revenue to satisfy company liabilities and debts.

What Piercing the Veil Means

Piercing the veil occurs when a court breaks down the wall. Generally, it happens when a company creditor or claimant wants to pursue an owner’s personal assets to satisfy a company liability or debt.

For example, suppose a vendor accuses an LLC of breaking a contract. If the LLC lacks the assets to pay for the vendor’s losses, the vendor could try to pierce the corporate veil to pursue the owners’ personal assets.

How Courts Pierce the Veil

State law determines the factors for piercing the veil. Most states set a high bar because liability protection is a central feature of LLCs.

Some states make piercing the veil nearly impossible. Texas law, for example, states that piercing the veil is not allowed in contract lawsuits unless the company committed actual fraud for the personal benefit of an LLC member.

The issue of piercing the veil will typically arise in a lawsuit against the LLC when the plaintiff seeks to add the owners as defendants. It can also happen in a lawsuit against the owners after the plaintiff seeks to enforce a judgment won against the LLC.

Factors Courts Weigh

The factors used by courts will differ by state. Your state will likely consider some specific factors.

Fraud or Misconduct

Many states ask whether the company exists so that the owners can commit fraud. Some owners form an LLC solely to block any liability for fraudulent acts.

Corporate Formalities

States will examine whether the owner disregarded corporate formalities, like drafting an LLC operating agreement. Bona fide companies will generally observe legal formalities.

Separation Between Owner and Company

Evidence of commingling personal and business assets and liabilities may be relevant. Owners who wish to benefit from the liability protection of an LLC will treat the company as an independent entity.

Company Capitalization

A judge may examine the LLC’s capitalization. This issue is relevant in two ways. First, a deliberately undercapitalized LLC cannot satisfy its debts and liabilities. From a court’s perspective, it would appear that the owners never gave the company the resources to pay its bills.

Second, an undercapitalized LLC is set up to fail because it lacks the capital to conduct business. Thus, it would appear to a judge that the LLC only exists to protect its owners.

The Unity of Interest Test

Although these factors lean heavily on fraud or deception, bad intent is not necessarily the reason that courts pierce the veil. Instead, it is just one factor that can affect a court’s decision.

Many states use the “unity of interest” test, also known as the “alter ego” test. In this test, the owner’s intent has little relevance. Instead, the court looks at whether the owner simply treated the LLC as a facade rather than a separate legal entity.

To maintain a separate existence, the LLC should have separate books, its own bank accounts, and ownership of its assets. When an owner commingles personal and company finances, a court may believe that the company is simply the owner’s alter ego.

For example, suppose an owner spends company funds on personal expenses, puts company equipment into the owner’s name, and does not maintain separate accounting ledgers. A court could rule that the owner did not treat the company as a separate entity, and, therefore, they are not entitled to its protection.

Legal Theories Courts Apply

When piercing the veil, courts balance two interests. On the one hand, LLCs are designed to foster commerce by protecting owners from company liabilities. On the other hand, unfair outcomes can result when courts rigidly enforce corporate liability protections.

Courts rely on a few concepts to balance these interests. First, many courts will examine all factors, with no dispositive factor. This ensures all interests are considered.

Second, many of the factors look at the owners’ intent. If the LLC was intended to shield the owners from liability rather than conduct business, the protection may be lifted.

Finally, the alter ego test examines the owners’ actions. When owners fail to treat the company as a distinct entity, the courts will do likewise.

Evidence of an Inequitable Result

Courts in some states also consider whether the result is unfair. Specifically, a court may examine whether piercing or refusing to pierce the veil will unjustly enrich one party at the other’s expense.

How to Protect Yourself From Liability

Generally, you will be entitled to liability protection if you create your LLC for a bona fide purpose and treat it as a separate legal entity. However, you should learn your state’s laws about piercing the veil so you can satisfy the specific factors your state’s courts consider.