The Doctrine of Piercing the Veil in an Era of Multiple Limited Liability Entities: An Opportunity to Codify the Test for Waiving Owners' Limited-Liability Protection

The use of the corporate form of business organization has always provided a firm's owners/shareholders with a presumptive shield from personal liability for the debts of the business. Case-by-case exceptions to this limited-liability shield have developed in each state under the general rubric of "piercing the veil." Courts and commentators alike have noted the vagueness of the piercing analysis and have questioned the appropriateness of some of the factors employed in that analysis. In addition, new forms of business entities, such as limited liability companies and limited liability partnerships, have been legislatively created over the past several decades, raising the issue of whether and by what standards their limited liability shields will be pierced. This is an opportune time to reexamine the piercing doctrine and to provide a uniform standard for all forms of limited liability entities.

The authors propose a Model Statute to replace the current common-law doctrine for determining when piercing will take place. Under the Model Statute, piercing is limited to situations in which the business owner (1) misrepresents the assets of the business, (2) engages in self-dealing transactions, or (3) takes assets from the business under circumstances that render the business insolvent. In the latter two situations, the owner's liability is limited to the amount received by the owner in excess of the value given in return unless the owner knew or should have foreseen that the transfer would result in the insolvency of the business.