What does the term “piercing the corporate veil” refer to?

The term “piercing the corporate veil” refers to holding corporate owners personally liable for business debts. This legal concept comes into play when a court determines that the separation between the corporation and its owners has been abused, allowing the owners to be held accountable for the corporation's obligations.

Typically, corporations provide limited liability protection, meaning that shareholders are not personally responsible for the debts and liabilities of the corporation. However, under certain circumstances—such as fraudulent activities, commingling personal and corporate assets, or failing to adhere to corporate formalities—a court may decide to set aside this protection. When this occurs, the corporate veil is “pierced,” and the owners may be required to satisfy debts with their personal assets.

Understanding this concept is crucial because it emphasizes the importance of maintaining a clear distinction between personal and corporate affairs among business owners to preserve the limited liability status typically granted by a corporate structure.