The "corporate veil" refers to the legal separation between a business entity, like a corporation or LLC, and the individuals who own or run it. That separation is what allows owners to limit their personal risk to the money they invested in the business, rather than exposing all of their personal assets to the business's liabilities.

This protection is a foundational reason people choose to incorporate or form an LLC rather than operate as a sole proprietor or general partner, where no such separation exists in the first place.

Courts generally look at whether the owners actually treated the entity as separate from themselves — maintaining its own bank accounts, following required formalities, and keeping adequate funding for its operations — or whether the entity was really just an extension of the owner's personal finances.

Other common factors include whether the entity was adequately capitalized when formed, whether it was used to perpetrate a fraud or an injustice on a creditor, and whether ignoring the entity's separateness is necessary to prevent an unfair result. No single factor is usually decisive on its own.

Veil-piercing claims often arise when an owner used the entity to hide personal assets from creditors, paid personal expenses directly out of business funds without any real accounting, or formed the entity specifically to avoid an existing or anticipated liability. A pattern of ignoring corporate formalities, like never holding meetings or keeping records, can also support a claim.

It can also come up when a business was so thinly funded relative to the risks of its operations that a court concludes the entity was never a legitimate, functioning separate business to begin with.

Keeping business and personal finances strictly separate, maintaining proper records and required formalities, ensuring the business is reasonably funded for its activities, and avoiding any use of the entity to mislead creditors are the main ways owners protect against having the veil pierced.

Because veil-piercing claims are fact-intensive and vary by jurisdiction, business owners facing a claim — or wanting to shore up their protection before one arises — often benefit from a business attorney's review of how the entity has actually been operated, not just how it was originally set up.