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“Piercing the Veil”

Under the law governing corporations, where an owner or owners of a corporation use the corporate form of business to engage in fraud while hiding behind the shield of limited liability, a court may hold the owners of the corporation personally liable to a third party. This is referred to as piercing the corporate veil. Since partners in a general partnership are personally liable for the debts of the partnership, this theory of liability did not apply to entities other than corporations.

Because these new limited liability entities shield owners of businesses from personal liability, commentators have suggested that the piercing-the-veil theory can apply to LLCs and LLPs. This theory would apply only in narrow circumstances, such as where owners of an LLC or LLP fail to follow proper formalities in forming or running the business, or where the business entity is being used to perpetuate fraud.

Inside “Piercing the Veil”