We frequently get asked by new clients about piercing the corporate veil on owner-operated companies that go out of business owing money. Everyone's heard about someone else piercing the veil to create personal liability for business debts and getting paid. These 'stories' make it sound simple and a highly effective method for recovering receivables.

Unfortunately, this is more myth than reality. The truth is that it is so expensive and uncertain to pierce the corporate veil that our clients rarely try.

One of the main reasons small business owners incorporate or form an LLC (limited liability company) is to protect their personal assets from the liabilities that their companies create. This legal structure creates an entity separate from the individual. However, if the owner co-mingles their personal financial transactions with their company transactions, then you can argue that the company is not truly separate from the individual. If you prevail in court with this argument, you have pierced the corporate veil and the owner is now personally liable for the money the business owes creditors.

Many (or most?) small business owners will pay some personal expenses from the corporate account since they are using pre-tax dollars and the expense reduces their tax burden. Meals, memberships, family cell phones and gasoline purchases, and subscriptions are common deductions. Others get more aggressive, paying home utilities, credit card bills, and other home improvement expenses from the business banking accounts. This may be by design to lower tax liabilities, or simply sloppiness where the owner treats the business checking account as if it was their personal money.

The problem in piercing the corporate veil is we don't know to what extent this co-mingling has occurred without getting to review all of the company's financial transactions. The only way to get access to these records is to file a lawsuit and then provide enough evidence to the judge of possible co-mingling to get court authorization for access to the company's books and records. Without some strong evidence, which our client's rarely have, the court will not grant this access. The cost to hire investigators to gather this evidence could easily be $5,000 to $25,000, which is prohibitively expensive in most collection cases.

If we do get access to the books and records, a professional needs to be hired to review the information and identify violating transactions. This could cost as little as $2,000 or more than $25,000 for larger owner-operated businesses. In addition, most attorneys who are willing to take standard collection claims on a contingency basis typically will require hourly compensation in cases where collection success is predicated on piercing the veil. Their fees will typically range from $10,000 to $50,000 in these cases.

We advise clients that if they want to try to pierce the corporate veil, they will be spending a minimum of $10,000 just to get started, and it could easily run $25,000 to $75,000 to press the point all the way to conclusion. And there is no guaranty of success in piercing the veil and/or ultimately collecting any money. Thus, this investment can only be justified when very large amounts are owed, the individual has personal assets available to pay the debt, and we have strong anecdotal suspicion of significant co-mingling. Since all of of these conditions are rarely met when we are asked about piercing the veil, our clients rarely attempt it.

A couple weeks ago I wrote about a simple personal guaranty that has frequently saved our client from significant losses. Despite all you may have heard about piercing the corporate veil, if you don't get a personal guaranty in advance, in reality you won't be able to get to an owner's personal assets if the business doesn't pay except in rare situations.