The limit to your LLC’s “Limited Liability”:

So, you just set up or already have an LLC in Colorado. Great! As you know, you and your business now have more protections against liability, but, did you know you’re still not 100% in the clear? It’s true! Courts can decide to put aside limited liability and hold a corporation’s shareholders or directors personally liable for the corporation’s actions or debts, through a process known as ‘piercing the corporate veil.’ The good news is, you can still ensure that no one can pierce your corporation’s protective veil and avoid personal liability by following these guidelines. 

What is the ‘Corporate Veil?’

When you establish a company by forming a business or limited liability company (LLC), you’ve created a separate legal entity that can enter into contracts, purchase goods and services, take on debt, and file lawsuits against others—legally, your business now has most of the same powers and rights you have as an individual. Generally, you, your corporation’s members, employees, and other owners are protected from certain liability associated with owning and operating the business—this protection is known as the ‘corporate veil.’ However, if the veil is pierced, members and managers may then be held personally liable for the entities acts. ‘Piercing the corporate veil’ refers to a situation in which courts put aside limited liability and hold a corporation's shareholders or directors personally liable for the corporation’s actions or debts. 

In the legal realm, courts understand the benefits of the corporate veil and limited liability, as having this protection encourages the development of public market for stocks, which in turn helps investors receive the benefits of those markets. Even so, the liability protection of the corporate veil to LLCs and other corporate structures is limited and not guaranteed. In Colorado, the protections of the ‘corporate veil’ apply to: (1) LLC’s, (2) C corporations, and (3) S corporations. They do not apply to sole proprietorships or general partnerships. Even if your company does enjoy the protections of the corporate veil, those protections can easily be breached—the “piercing” of the corporate veil—and if this happens, it can be very challenging for your business to recover.

What should I do to make sure the corporate veil won’t be pierced and my corporation will be protected?

There are multiple ways the veil may be pierced, some examples are if you or anyone in your company commits acts of fraud, comingling of funds, or fails to follow corporate formalities, the corporate veil will be effectively ‘pierced’ and you as the business owner will be held liable. Your LLC should follow necessary formalities, such as properly updating company by-laws, maintaining stock or membership ledges, and holding annual meetings of directors and officers. Additionally, you and your corporation (and any of your employees) must maintain a separate bank account, file separate tax returns, and you should only use corporate assets for corporate rather than personal purposes.

If you own a small business or LLC and want to know more about the rights and protections your business has in Colorado, GLO is here to help. Fill out an interest form today to see if GLO can help you. 

GLO has prepared this blog to provide general information on legal issues that may be of interest. This blog does not provide legal advice for any specific situation and this does not create an attorney-client relationship between any reader and GLO or its attorneys. GLO engages clients only through specific fee arrangements and signed engagement letters. GLO does not guarantee any results.