What does piercing the corporate veil mean?

Piercing the corporate veil is when a court ignores the LLC's separate legal existence and holds the owners personally liable for business debts or judgments. This typically happens when owners treat the LLC as a personal piggy bank — commingling personal and business funds, failing to maintain separate records, or using the LLC to commit fraud.

Courts consider several factors when deciding whether to pierce the veil: (1) Commingling of funds — using the business account for personal expenses or vice versa, (2) Undercapitalization — forming the LLC without adequate funding to cover foreseeable obligations, (3) Failure to observe formalities — no operating agreement, no separate bank account, no meeting minutes, (4) Alter ego — the LLC is indistinguishable from the owner in practice, (5) Fraud or injustice — the LLC was used to deceive creditors. Prevention: maintain a separate business bank account, keep an operating agreement on file, document major business decisions, never sign personal guarantees unnecessarily, and always identify yourself as acting on behalf of the LLC (not personally) in contracts.