What is Connecticut LLC Veil Piercing and When Does it Happen?
There’s a doctrine in Connecticut law that every LLC member should know. It’s called veil piercing. Ideally, you never have to worry about it applying to you.
We don’t bring veil piercing up to scare anyone. Instead, we bring it up because understanding why courts occasionally disregard the LLC shield tells you exactly how to make sure it never happens to you.
What is Veil Piercing?
An LLC is a separate legal entity. That separateness is the whole point. It’s why the company’s debts don’t automatically become yours. However, Connecticut courts recognize equitable doctrines that let them disregard that separateness. This only happens in genuinely exceptional circumstances. Specifically, the question courts ask is simple: has someone so controlled, dominated, or misused the entity that justice requires holding the individual member personally liable for a debt or claim of the LLC?
A 2019 Case Shows Where the Line Sits to Protect LLC Members
Connecticut’s Appellate Court, in Crosskey Architects, LLC v. Poko Partners, LLC gave a complete picture of what “misuse” looks like in real life, so it’s worth sitting with the details of that case for a minute. The Appellate Court affirmed veil piercing in that case based on a pattern, not one bad fact. For instance, the defendants used multiple related entities and individuals together. Control of those entities overlapped. The members shifted liabilities from one entity to another. Some entities remained undercapitalized or served a single purpose, existing mainly to absorb risk. On top of that, they shared office operations, which blurred the line between “companies.” Finally, their conduct misled or avoided legitimate creditor claims.
What strikes us about Crosskey is that no single fact would have sunk the defendants on its own. After all, plenty of businesses share office space with related entities. Likewise, plenty of businesses have more than one entity in their structure for legitimate reasons. Instead, the combination mattered most. In short, the pattern of using multiple entities together in a way that consistently left creditors with no recourse to collect debts led the court to conclude that the defendants were using the corporate form as a tool to avoid claims, and not as a genuine business structure.
What This Actually Means for You
If you’re running a legitimate business through your LLC, none of this should ever touch you, as long as you apply formal rules to running it and act in good faith. That’s because veil piercing exists to hold owners accountable who use an LLC (or other legal entity) to mislead others or evade responsibility. It’s not aimed at ordinary small businesses run honestly. So, a single-member LLC that operates the way it’s supposed to looks nothing like the fact pattern in Crosskey.
Here’s the part we want to leave you with. Connecticut law is actually pretty forgiving on formalities. Failing to observe them isn’t, by itself, a ground for personal liability. In other words, you don’t need to run your one-person LLC like a Fortune 500 company. You don’t need monthly board meetings or formal resolutions for every decision. Instead, you just need to actually treat it like a real, separate business, which is exactly what we’ll cover in a later post.
Let’s Talk
If you’re structuring a business with multiple entities, that’s worth a conversation. Likewise, if you’re not sure whether the way you’re running things creates unnecessary veil-piercing risk, let’s talk before it’s ever a problem. Give us a call.
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