The primary reason you formed an LLC or Corporation was likely the “Corporate Veil”—the legal barrier that separates your personal savings, house, and car from the liabilities of your business. You assume that if the business gets sued or goes bankrupt, your personal life remains untouched.
That assumption is not absolute.
In New Jersey, a creditor or plaintiff can ask the court to “pierce the corporate veil.” If they succeed, the legal distinction between you and your company vanishes, and they can seize your personal assets to satisfy a business judgment.
When Does a Court Pierce the Veil?
Courts in New Jersey are generally reluctant to pierce the veil, but they will do so if they believe the business is a “sham” or an “alter ego” of the owner used to perpetrate a fraud or injustice.
They look for specific red flags:
- Commingling of Funds: This is the #1 killer of liability protection. Did you pay your home mortgage out of the business checking account? Did you deposit client checks into your personal savings? If money moves freely between you and the business without documentation, the veil is thin.
- Undercapitalization: Did you start the business with enough money to reasonably cover its potential debts? If you formed a construction company with $1 in the bank and no insurance, a court might say you never intended to operate responsibly.
- Ignoring Formalities: Treating the company like a sole proprietorship rather than a distinct entity.
Legal Concept: The “Alter Ego” theory suggests that if the shareholder and the corporation are one and the same in practice, they should be one and the same in liability. You can read more about the legal theory of Piercing the Corporate Veil on Wikipedia.
The Litigation Danger Zone
Imagine your business is sued for breach of contract or negligence. The plaintiff realizes your LLC has no assets—it’s broke. Their lawyer will then amend the complaint to name you personally as a defendant.
They will demand to see your bank records during discovery. They are hunting for that one transaction—that one time you bought groceries with the company card—to prove that the LLC is just a shell.
If you are currently facing a lawsuit where this threat has been made, you need a business litigation attorney immediately. The defense requires proving that the company maintained its distinct identity despite any minor errors.
How to Strengthen the Veil
You can reinforce your protection today, even if you have been lax in the past.
- Strict Financial Separation: Never, ever mix funds. If you need money from the business, write a formal check for a “Member Draw” or “Salary.” If the business needs money, write a check from your personal account and mark it as a “Capital Contribution” or a “Loan” (with a promissory note).
- Paper Trails: Every major decision should be documented. Did the company buy a truck? There should be a “Resolution of the Members” approving the purchase.
- Insurance: Adequate liability insurance helps argue against undercapitalization.
Risk Analysis
If you have significant personal assets and operate in a high-risk industry (like construction or healthcare), standard LLC protection might not be enough. We often conduct business legal risk analyses to structure multiple entities. For example, a holding company might own the expensive equipment and lease it to the operating company. If the operating company is sued, the equipment is safe in the holding company.
Don’t wait for a lawsuit to find out your shield is made of paper.
