The terms “Piercing the corporate veil” or “alter ego liability” are regularly used to describe a judicially created principle which allows a creditor to pursue the individual owners of an entity such as a corporation. Courts will permit a creditor to pursue a claim against individual owners if certain factors are present, and piercing is necessary to avoid an injustice. Piercing can be justified if some of the following factors exist: inadequate capitalization, commingling of funds, and failure to observe proper formalities.

It is important to note that, a member-employee will always remain personally liable for damages caused by his or her own negligence and intentional acts of misconduct, regardless of the existence of the corporation.

A person is always liable for his own wrongful acts, whether intentional or accidental. Accordingly, an owner of a corporation will always remain personally liable for damages caused by his or her own negligence and intentional acts of misconduct, regardless of the existence of the entity. For example, an owner of small corporation gets into a car accident on the way to work. The corporation would not protect such a person from personal liability arising from their negligence.

Businesses hard-pressed to make payroll or facing a financial crisis invariably fail to pay to the IRS the employees’ portion of taxes withheld. It is important to note that the person who is responsible for the payment of taxes withheld from an employee’s pay and for payment of the employee’s share of payroll taxes holds those funds in trust for the federal government. The IRS will hold you personally responsible for this failure, even if you are operating as a corporation.

Of course, if an owner of a corporation executes a personal guaranty of a bank loan or lease, or some other contract, he or she will be personally liable for the debt. For example, a married couple operates an LLC. In order to help with finances, the owners ask a local bank for a loan. The bank agrees to provide the loan, but only if the couple personally pledges the equity in their house as security for the loan. If the owners agree to this, and the corporate business fails and is unable to pay off the loan, the bank would have the authority to go after the owners individually, or even foreclose on the house.