Fashion Designers Beware: The Corporate Veil Can Easily Slip, Even After a Judgment

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As proud as you are of your company, remember that it is a separate person, and treating its achievements as purely your own and its income as your personal bank account may get you into trouble. That was the import of a California appellate court decision issued on December 31, 2013, which made it easier to find business owners personally liable for a judgment entered against their limited liability entity.

“Piercing the corporate veil” is a legal concept that permits a court to make owners of a limited liability entity – such as a limited liability company (LLC), a limited partnership (LLP), or a corporation - personally liable for their entity’s obligations. Generally, a corporation, an LLC or LLP is considered to be a separate legal persona distinct from its shareholders, members or owners – as if there was a “veil” separating the owner from the entity. Unless a creditor of the entity can pierce that veil, the owner has no liability for the entity’s obligations. When the owners fail to respect this distinction – from financial, legal and corporate formality perspectives – the veil may be “pierced” and the owners may be found to be the alter egos of their entities (essentially one and the same). As a result, the entity’s liabilities become the personal liabilities of its owners.

This is the outcome in Relentless Air Racing, LLC v. Airborne Turbine Ltd. Partnership. Not only were the judgment debtor’s owners held personally liable for their entities obligations, they were added as judgment debtors after the judgment against their entity was entered.