Piercing the Corporate Veil in New York: When Can Owners Be Personally Liable?
One of the primary reasons entrepreneurs form corporations or limited liability companies is to shield owners from personal liability. In New York, however, that protection is not absolute. Under certain circumstances, courts will “pierce the corporate veil,” holding shareholders, members, or principals personally liable for a company’s obligations.
This article explains how veil piercing works under New York law, when courts are willing to apply it, and what business owners can do to reduce their exposure.
What Does “Piercing the Corporate Veil” Mean?
“Piercing the corporate veil” refers to a court’s decision to disregard the legal separateness of a corporation or limited liability company and impose liability directly on its owners or those who control it.
If the veil is pierced:
Personal assets may be used to satisfy corporate debts or judgments
Limited liability protections are lost for the claims at issue
Formal corporate structure provides no protection if misused
New York courts consistently emphasize that veil piercing is an extraordinary and equitable remedy, not a routine theory of liability.
The Two-Part Test Under New York Law
To pierce the corporate veil, New York courts generally require proof of both of the following elements.
1. Complete Domination and Control
The plaintiff must show that the owner exercised such complete domination over the entity that the corporation or LLC had no independent existence of its own with respect to the transaction at issue.
Courts consider factors such as:
Failure to observe corporate or LLC formalities
Commingling of personal and company funds
Undercapitalization of the business
Use of corporate funds for personal expenses
Absence of separate books, records, or bank accounts
Common ownership and management without meaningful separation
Dominion alone, however, is not sufficient to pierce the veil.
2. Use of That Domination to Commit a Wrong or Injustice
The plaintiff must also show that the domination was used to commit a fraud, wrong, or inequitable conduct that resulted in injury.
Examples include:
Stripping corporate assets to avoid paying creditors
Using the company as a shell to evade contractual obligations
Transferring funds to insiders after a dispute arises
Operating the entity solely to shield personal misconduct
New York courts are clear that veil piercing is not a remedy for ordinary breach of contract or poor business decisions. The focus is on misuse of the corporate form.
Does the Doctrine Apply to LLCs?
Yes. Veil piercing applies to both corporations and limited liability companies in New York.
While LLCs are not required to observe all the same formalities as corporations, courts still expect:
Separation between personal and company finances
Legitimate capitalization and business purpose
Good-faith operation as a distinct legal entity
Single-member LLCs and closely held companies are particularly vulnerable when these safeguards are ignored.
Common Contexts Where Veil Piercing Is Asserted
Veil-piercing claims most often arise in:
Commercial contract disputes
Judgment enforcement proceedings
Fraud and misrepresentation cases
Closely held or family-owned businesses
Insolvency and asset-transfer disputes
In practice, veil piercing is frequently pleaded in addition to substantive claims, even though it is rarely granted on its own.
Why Veil Piercing Claims Matter—Even When They Fail
Although New York courts are reluctant to pierce the corporate veil, such claims are often fact-intensive and may survive early dismissal.
The practical risks include:
Intrusive discovery into personal finances
Increased litigation costs and exposure
Settlement pressure created by the risk of personal liability
For business owners, defending a veil-piercing claim can be costly even when the claim ultimately fails.
How Business Owners Can Reduce Veil-Piercing Risk
Business owners can significantly reduce exposure by maintaining basic separation and discipline:
Keep personal and company finances strictly separate
Avoid using company funds for personal expenses
Adequately capitalize the business
Maintain core records and documentation
Use written agreements for related-party transactions
Act in the company’s interest rather than personal convenience
Respecting the corporate form remains the strongest defense.
Conclusion
Limited liability is a powerful protection under New York law—but only when it is respected. Courts will pierce the corporate veil when owners abuse the corporate form to commit wrongdoing or create injustice.
Early legal analysis is critical for both business owners seeking to protect themselves and creditors evaluating potential recovery options.
Disclaimer
This publication is for general informational purposes only and is not intended as, and should not be relied upon as, legal advice. Legal outcomes depend on specific facts and applicable law, which vary by jurisdiction and over time. No attorney-client relationship is created by reading or relying on this article. Readers should consult qualified legal counsel regarding their particular circumstances.
