The Mythical Corporate Veil: Too Expensive for Commercial Collectors to Pierce?

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Dean Kaplan

Many small business owners form a corporation or LLC primarily so that only the entity is liable for the business’s debts and their personal assets are shielded from the business’s liabilities.

We all hear stories about “piercing the corporate veil” to create personal liability for a small business debt.  The story-tellers typically share with glee how they ‘nailed’ the owner and eventually got paid.  In my experience, this is more myth than reality.

On the occasions where our commercial collection agency clients have asked about piercing the corporate veil, the potential cost and difficulty usually dissuades them from pursuing this alternative.  The attorneys we work with that typically handle collection litigation on a contingency basis usually want to charge hourly if collection success is predicated on piercing the veil.  In most potential cases, the attorneys estimate the cost to try to pierce the corporate veil will be $10,000 and up, as explained in this article I recently published on CreditToday.

Wanting to make sure there wasn’t some short-cut I wasn’t aware of, I recently posed this question in a LinkedIn discussion group:  “Piercing the Corporate Veil – anyone have any tips to share?

Too often we find it is more expensive and difficult than it is worth to try to pierce the veil – especially when up front all we have is a strong suspicion and not hard evidence. I’m curious if anyone has insights on how to do this more effectively with small business owners who haven’t paid invoices.”  View Dean Kaplan's profile on LinkedIn

Unfortunately, the answers all came back confirming my experience:  it is difficult and expensive to try to pierce the veil.

One of the common hurdles is that we only have suspicion that the business owner co-mingled personal and corporate finances.  If we don’t have hard evidence, that means the evidence will have to be gathered during the debt collection litigation process, through interrogatories, depositions, and forensic analysis of the information that is obtained.  This is a time consuming and expensive process.  The net impact of this is that our clients rarely are willing to invest the funds necessary to pierce the veil, and can only justify this expenditure when very large balances are owed and there is some indication that there are attachable personal assets if we are successful in getting a judge to rule in our favor.

Our advice to clients is to try to get a personal guaranty up front when initially granting or increasing the businesses’ credit limit.  While this does not guaranty getting paid, it does provide a secondary source of repayment, and it is a much easier way to create personal liability than trying to pierce the corporate veil after invoices have not been paid.

Continuing the Discussion

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  • avatar DONALD DALY says:

    The lender has a job to do other than SELL. If the provider of credit doesn’t know want to do that will protect their interest they should be left to swing without any benefit of taking the write off as a credit at tax time. PERSONAL GUARANTEES still exist, but lenders seem to be afraid to approach that topic for fear of loosing the SALE. Big money created the LLC for a reason and there is no way it will ever be overturned so it’s time for the lender to do what they can to prove their value and common sense.

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