Don’t be Pierced by the Corporate Veil: Avoiding Personal Liability for Your Business

So you've started a business. It's an exciting milestone, and if you've already formed a limited liability company (LLC), you've taken a smart first step. The promise of "limited liability" is appealing for a good reason: it means your personal assets- like your home, savings, and car- are generally safe if your business ever faces debts or a lawsuit.

But this protection isn't absolute, and many business owners aren't aware of the risks that can put their personal assets in jeopardy. This is where we come in. At GLO, we specialize in helping entrepreneurs and business owners understand and strengthen these legal safeguards. We prepare and review operating agreements, ensure our clients know their responsibilities, and help structure businesses to avoid unnecessary personal exposure. Because while forming an LLC is a great start, it's just the beginning of truly protecting your personal assets.

What Is the Corporate Veil?

When you form an LLC or a corporation, you're creating a new, separate legal entity. Think of it as a legal person that can do many of the same things you can: sign contracts, own property, and take out loans. This separation between you and your business is called the corporate veil. Its purpose is to shield you, the owner, from being held personally responsible for your company's actions or debts. Read The ABCs of LLCs: How to Start Your Small Business Today for more information on LLCs.

Unfortunately, courts have the power to "pierce the corporate veil" and hold you personally liable. This usually happens when the line between your personal life and your business is blurred. If you're mixing personal and business finances, failing to keep clear records, or using the business as a shell to avoid responsibility, you're at risk. And once that veil is pierced, your personal assets could be on the line.

In Colorado, this protection applies to LLCs, C corporations, and S corporations, but not to sole proprietorships or general partnerships. And even if you have a properly formed entity, the protection can quickly unravel if you're not following certain rules.

Common Mistakes That Undermine Your Protection

Many mistakes can weaken your liability shield, making it easier for a court to hold you personally responsible. For example, if your LLC doesn't have a well-drafted operating agreement, or if you fail to keep corporate records up to date, your liability protection may not hold up in court. Using the same bank account for both business and personal expenses is a red flag, as it can signal to a court that your company isn't truly operating as a separate entity. Not filing separate tax returns for your business or failing to maintain internal protocols can also put you at risk.

Fortunately, avoiding these outcomes is entirely possible. By keeping your business and personal finances separate, maintaining updated corporate records, and following internal protocols, you can help ensure that your LLC functions as a distinct entity. When your business operates properly, your personal liability protection is far more secure.

GLO Can Help You Stay Protected

At GLO, we help business owners understand these nuances and stay in compliance. Whether you’re starting a new business or want to shore up the structure of an existing one, our team is here to guide you. If you’re unsure whether your business is truly protected, or if your corporate veil might be at risk, reach out. We’re ready to help you strengthen your business’s foundation and protect what matters most—your personal peace of mind. Read LLCs in Colorado: Formation, Management, and Key Considerations to learn more about how GLO can help ensure a successfully protected LLC.

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GLO has prepared this blog to provide general information on legal issues that may be of interest. This blog does not provide legal advice for any specific situation and this does not create an attorney-client relationship between any reader and GLO or its attorneys. GLO engages clients only through specific signed fee agreements.