Pierced Veils: 5 Surprising Stories of LLC Owners Losing Their Liability Protection

Most business owners form an LLC under the assumption that it creates an impenetrable shield between their personal assets and business liabilities — and, generally speaking, it does.

This is because an LLC operates as a separate legal entity, meaning that any debts or liabilities incurred by the business are generally not transferable to the personal assets of its owners.

Having said that, this protection has its limits and can be easily pierced by a number of seemingly “minor” mistakes, leaving you personally liable for all debts, liabilities, and obligations incurred by the business.

In this article, we’ll take you through five real-life stories of LLC owners who lost their liability protection and show you exactly what you can do to avoid making the same mistakes.

5 Cases of Lost Liability Protection

Generally speaking, the limited liability offered by an LLC can be taken away — which is known as piercing the corporate veil — if a court determines that the business is not being treated as a truly separate legal entity.

This often happens when LLC owners fail to maintain clear boundaries between their personal and business finances —  for example, by using personal funds for business expenses, combining bank accounts, or personally guaranteeing business debts.

Below, we’ve broken down five real-world cases of where LLC owners learned this lesson the hard way.

Case 1: The Empty LLC Deal

In 2021, an investor in Florida used an LLC to sign a real estate purchase agreement requiring a $500,000 deposit within three days. After conducting a more detailed inspection of the property, he decided the deal was not in his best interest and chose not to proceed, assuming the contract bound only the LLC and not him personally.

The seller sued, alleging the LLC was essentially a shell with no meaningful assets or operations. Court proceedings later confirmed that the LLC had neither a bank account nor any financial infrastructure at the time of the contract, supporting the claim that it was simply an extension of the investor rather than a truly separate entity.

As a result, the trial court sided with the seller, noting that although the LLC had participated in past deals, it currently lacked any meaningful assets or activity — demonstrating insufficient separation from its owner and leading to the investor being held personally liable.

What This Means: Even if an LLC has been active in the past, having no real operations or assets at the time of a significant deal can lead a court to treat it as a mere instrument. 

Case 2: The Corporate Shell Game

In 2015, Woodman Maroc, the management company for a luxury hotel in Casablanca, defaulted on its financial obligations, leaving the hotel’s owners with $55 million in unpaid debt.

Arbitration proceedings revealed that while the management company was under significant financial distress, it had been diverting funds to other businesses owned by the same parties instead of using those funds to address its growing debts.

Essentially, the company failed to uphold its role as an independent entity and prioritized the interests of its owners at the expense of its creditors — all while operating in a state of insolvency.

As a result, in 2024 a Delaware court ruled that the LLC’s veil should be pierced, allowing the hotel’s owners to pursue the full $55 million debt directly from the entities that benefited from the misappropriated funds.

What This Means: Complex corporate structures won’t protect you if you misuse your LLC to divert money from an insolvent subsidiary in order to serve your broader financial interests — courts will prioritize substance over form, even if you maintain the appearance of separateness on paper.

Case 3: The Mismanaged Roofing LLC

In 2013, a Michigan homeowners’ association hired a small roofing company owned by a single individual to replace the neighborhood’s roofs. When the work turned out to be substandard, the association sued and won a judgment, only to then discover that the roofing company was broke and in the process of filing for bankruptcy.

Undeterred, the association pursued the LLC’s owner personally. The owner argued he wasn’t liable, claiming the LLC shielded him from the company’s debts. 

However, during court proceedings, it was revealed that the owner had repeatedly used company funds to cover personal expenses over the years — actions the court saw as a blatant disregard for the separation between personal and business finances required for an LLC.

As a result, the court ultimately pierced the LLC’s veil, holding the owner personally liable for the faulty roofing job and all resulting damages.

What This Means: If you treat an LLC like a personal bank account (e.g., by commingling funds, skipping formalities, failing to maintain proper records, etc) you’ll risk losing the liability protection you intended it to provide.

Case 4: The Cost of Negligence

In 2013, a Montana couple hired a home inspection LLC to evaluate a property before finalizing their purchase. After closing the deal, they discovered significant defects in the home, including structural damage, mold, and water intrusion — all issues that the inspector failed to report.

Frustrated and facing costly repairs, the couple sued both the LLC and its sole owner, alleging gross negligence. During the proceedings, the plaintiffs demonstrated that the inspector had entirely missed a number of structural issues, failed to document visible signs of damage like rust and water stains, and falsely marked the property as structurally sound in his report.

The court determined that the inspector’s negligence went beyond a simple breach of contract. His failure to act responsibly directly harmed the couple, and the judge ruled that his actions constituted a personal tort. As a result, the court pierced the LLC’s veil and held the inspector personally liable for $300,000 in damages under Montana’s Home Inspection Trade Practices Act and Consumer Protection Act.

What This Means: Personal negligence can override the liability protection of an LLC. If your actions directly harm a client, courts can hold you personally accountable regardless of the corporate structure you operate under.

Case 5: The Startup Without Structure

In 2020, a California-based tech startup was founded by two entrepreneurs aiming to revolutionize the app development industry.

Despite securing early-stage investors and landing significant contracts, the startup operated with little structure. The founders failed to create or follow any type of formal decision-making process, neglected to maintain any sort of records, and largely handled business matters informally through personal emails, text messages, and social media.

When the startup faced a breach-of-contract lawsuit from a major client over a failed project, the plaintiffs uncovered the lack of formal governance and argued that this demonstrated that the LLC was merely an extension of the founders’ personal operations.

The court agreed, ruling that the founders’ consistent disregard for corporate formalities showed that the LLC was not functioning as a separate entity. As a result, the court held both founders personally liable for the $1 million judgment awarded to the client.

What This Means: Merely filing LLC paperwork won’t protect you if you ignore the formalities that legally distinguish your business from your personal affairs.

So, How Can I Protect My LLC?

Well, the answer is simple: by treating your LLC the way it’s meant to be treated — as a separate legal entity.   

While the interpretations of the rules may vary slightly from state to state, the overarching principles for safeguarding your LLC are universal, and include:

• Maintaining a clear separation between personal and business finances.
• Ensuring your LLC is adequately capitalized to meet its obligations.
• Not engaging in any form of dishonest, fraudulent, or deceptive practices.
• Keeping detailed and accurate records, including proper documentation of all major business decisions.
• Maintaining clear and accurate financial and operational records.
• Operating with transparency and acting in the best interests of the business.
• Ensuring that your LLC is properly funded and operational before conducting business.

And that’s it; as long as you do what you’re supposed to do, your LLC will do what it’s designed to do, which is to provide an affordable means for you to protect your personal assets from corporate liability. 

LLC Owners and Lost Liability Protection FAQs