Piercing the corporate veil happens when a court sets aside the legal wall between a business and its owner, letting creditors or plaintiffs reach the owner’s personal assets to satisfy a business debt or judgment. It usually happens because the owner treated the business as an extension of themselves instead of a separate legal entity, mixing personal and company finances, skipping formalities, or leaving contracts and agreements too loose to hold up in court. Attorney and asset protection coach Scherrie L. Prince joined Ben on DissedMedia: A Startup Story to explain how entrepreneurs build real protection around their business before growth outpaces it.
Scherrie is an attorney, asset protection coach, entrepreneur, and host of the Play Big Faster podcast. She works with founders to merge their business plan with their estate plan, close off the risks most entrepreneurs never think about until something goes wrong, and build what she calls a moat around their assets. She is also the author of Build The Moat First: A Practical Guide for Entrepreneurs Who Want to Grow Without Building a Fragile Business.
What Piercing the Corporate Veil Actually Means
An LLC or corporation exists as its own legal person under the law. That separation is what keeps a lawsuit against the business from reaching the owner’s house, car, or personal bank account. Piercing the corporate veil is the legal process where a court decides that separation was never real in practice, even if it looked real on paper.
Scherrie pointed to co-mingled funds as one of the most common triggers. Borrowing from a personal account to cover payroll during a lean month, or running a business expense through a personal card because it is faster, blurs the line courts look at when they decide whether an entity deserves protection. Once a plaintiff proves the business and the owner were functionally the same wallet, the veil comes down and personal assets become part of the case.
Why Entrepreneurs Accidentally Pierce Their Own Veil
Most founders do not intend to create this risk. They form an LLC, feel protected, and stop thinking about it. Scherrie explained that the danger usually comes from small habits: using a personal email account for business communication, carrying only one phone number for both personal and company use, or never separating bank accounts cleanly.
Ben raised a related point from his own consulting work. When a married partner is involved in a business that later takes on debt or gets sued, and the corporate structure has been treated loosely, that spouse can be pulled into the fallout even though they never signed anything directly related to the claim. Keeping communication, banking, and contracts cleanly separated protects both the business owner and the people connected to them.
Building the Four-Part Asset Protection Framework
Scherrie walks clients through a four-part decision framework that starts before the business itself. The first question is whether the owner has a will or a trust, because everything else in the business eventually has to fold back into an estate plan. From there, she looks at whether the business is service-based or product-based, since that shapes upfront capital needs and regulatory exposure. Next comes location: brick-and-mortar, virtual, or hybrid, which determines choice of law and where contracts get enforced. The final piece is privacy, meaning whether the owner needs the kind of anonymity that comes with incorporating in a state like Nevada, Delaware, or Wyoming.
She used the public dispute over Gene Hackman’s estate as an example of what happens when this planning gets skipped. Hackman had a will that was reportedly left untouched for around two decades, and after his wife predeceased him, the document did not clearly account for changed circumstances. That gap has left a multimillion-dollar estate in a contested legal fight. Scherrie’s point was simple: a will or trust is not a document you write once and file away. It needs to be revisited at least once a year as life and business circumstances change.
Choosing the Right Business Entity and State
Ben asked Scherrie directly about the tradeoffs between registering a business in a home state like Georgia versus a state like Delaware or Nevada. Her answer was that it depends entirely on the type of business. Real estate holdings, for example, are usually governed by the law of the state where the property sits, so incorporating somewhere else for privacy reasons can create conflict-of-law problems if a dispute ever goes to court. If the business is more likely to face liability from customers or the public, staying in the state where those claims will be litigated, and where the local law is more favorable to the defendant, can matter more than the anonymity benefits of an out-of-state entity.
She also encouraged founders to think about their exit from day one, borrowing Stephen Covey’s phrase to begin with the end in mind. An exit does not always mean a sale. It can be a merger, a bankruptcy reorganization, a transition into retirement, or passing the business to the next generation. Planning for more than one version of that outcome, and separating operating assets from company assets early, keeps a single lawsuit from being able to reach everything the business owns.
The Partnership Mistake That Almost Always Goes Wrong
Scherrie shared that her first business, before law school, was a partnership that failed. She and a partner built the business on a handshake, with employees, contracts, and a location, but nothing in writing covering what would happen in the event of death, incapacity, or a partner simply walking away. When that partner’s wife showed up one day and announced she was the new partner, there was no agreement in place to say otherwise.
Ben added a pattern he has seen repeatedly, where two partners split ownership 50/50 without accounting for who is actually doing the work. Over time, one partner tends to carry more of the operational load while the other steps back, and the imbalance only becomes a real problem when a big opportunity or a big client shows up and the disengaged partner wants back in. Scherrie’s advice is to treat a titanium operating agreement and a buy-sell agreement as non-negotiable from the start, along with a spousal consent form if either partner is married, so continuity is protected no matter what happens to the people involved.
Writing an Operating Agreement That Actually Protects You
A do-it-yourself operating agreement pulled from a generic template often uses language so broad, such as stating the business exists for “any lawful purpose,” that it fails to hold up when it matters most. Scherrie explained that investors and lenders request a copy of the operating agreement during due diligence, and a document that is too vague can make a business look disorganized or risky rather than fundable.
She also pointed out that founders drafting their own agreements sometimes list themselves personally as a member when the ownership is actually meant to sit with a separate entity, simply because they do not know the difference. Getting the operating agreement drafted by someone who understands the structure, rather than relying on a downloaded form, closes a gap that becomes far more expensive to fix after the business has grown.
Merging Your Business Plan With Your Estate Plan
The through line in Scherrie’s work is that a business plan and an estate plan cannot exist separately. If an operating agreement states that shares must be offered to the LLC or its members before being sold, the owner’s will or trust needs to mirror that same instruction. Otherwise a business decision on paper and a personal decision in an estate plan can directly contradict each other, leaving a mess for whoever is left to sort it out.
She also raised estate planning as a practical answer for couples who never signed a prenup. Rather than raising the idea of a postnuptial agreement, which can feel confrontational, working through a joint estate plan together accomplishes something similar. It lets both partners define what happens to business interests and personal assets without framing the conversation as a vote of no confidence in the marriage.
Building a Money Team Before You Need One
Scherrie recommends every entrepreneur put together what she calls a money team: the banker, insurance agent, tax preparer, and attorney who are already part of the business, brought together to work from the same page instead of operating in separate silos. Getting these professionals on a call once a year, even for thirty minutes, keeps the plan current as the business changes.
This kind of coordination connects directly to raising capital the right way, since investors expect clean books and a coordinated advisory team before they commit funding. It also overlaps with protecting a startup with the right legal structure from the ground up, since intellectual property protection and asset protection often rely on the same underlying entity decisions.
For a deeper legal definition of how courts approach this issue, the Cornell Law School Legal Information Institute maintains a detailed explanation of the doctrine and the factors courts weigh.
Frequently Asked Questions
What does piercing the corporate veil mean in simple terms?
It means a court has decided that a business and its owner were never really separate in practice, even though the business was formed as its own legal entity. When that happens, the owner’s personal assets can be used to satisfy a business debt or lawsuit judgment.
Can an LLC protect my personal assets from a lawsuit?
An LLC provides real protection when it is treated as a genuinely separate entity, with its own bank accounts, contracts, and formalities. If personal and business finances are co-mingled or the entity is not maintained properly, a court can disregard that protection through piercing the corporate veil.
What is the difference between a will and a trust for a business owner?
A will directs how assets are distributed after death and typically goes through probate. A trust can hold and distribute assets without probate and, depending on how it is structured, can operate for a longer period of time, which matters for business owners who want their company or its proceeds to benefit multiple generations.
Do I need a formal operating agreement if I trust my business partner?
Yes. Trust between partners does not account for death, incapacity, divorce, or a partner simply wanting to leave the business. A formal operating agreement and buy-sell agreement protect the business and everyone connected to it regardless of how the relationship between partners changes over time.
What is a money team and why does every entrepreneur need one?
A money team is the group of professionals, typically a banker, insurance agent, tax preparer, and attorney, who already work with the business but are brought together to coordinate rather than operate separately. Meeting as a group at least once a year helps catch gaps before they become expensive problems.
Watch the Full Conversation
Watch the full episode with Scherrie L. Prince below for the entire conversation on asset protection, entity structure, and estate planning for entrepreneurs.
