One of the primary reasons entrepreneurs form corporations and limited liability companies is to protect their personal assets from business liabilities. This protection, often called the "corporate veil," is a foundational principle of business law. However, Nebraska courts, like courts across the country, will sometimes disregard the corporate form and hold individual owners personally liable for business obligations. Understanding when this doctrine applies and how to avoid it is essential for any business owner.
The Corporate Veil: The Baseline Protection
When a business is properly formed and operated as a corporation or limited liability company, the entity is legally distinct from its owners. This means that the debts, liabilities, and legal obligations of the business generally cannot be enforced against the owners personally. A creditor who obtains a judgment against a corporation can pursue the corporation's assets but ordinarily cannot reach the personal bank accounts, homes, or other property of the shareholders or members.
This liability protection is not absolute. Nebraska courts have recognized that in certain circumstances, justice requires holding owners personally liable despite the existence of a formal business entity. The process by which a court sets aside the corporate form is called "piercing the corporate veil."
When Nebraska Courts Will Pierce the Veil
Nebraska courts apply a two-part test for determining whether to pierce the corporate veil. First, the court examines whether the corporate form was used as a mere instrumentality or alter ego of the dominant shareholder, meaning the owner treated the business as an extension of their personal affairs rather than as a separate entity. Second, the court asks whether adherence to the corporate fiction would sanction a fraud, promote injustice, or lead to inequitable consequences.
Factors Nebraska courts consider when evaluating whether the veil should be pierced include:
The corporate veil is not impenetrable, but it is remarkably durable when business owners observe the basic disciplines that demonstrate the entity is genuinely separate from themselves. Consistency and documentation are the keys to maintaining protection.
The Alter Ego Theory
The most common theory courts use to pierce the corporate veil in Nebraska is the alter ego doctrine. Under this theory, a court may treat the corporation or LLC as the mere alter ego of the owner if the distinction between the two has been deliberately ignored or has collapsed as a practical matter. Nebraska courts look at the totality of the circumstances rather than any single factor when making this determination.
The alter ego doctrine can apply not just to owners who directly control the entity but also in parent-subsidiary corporate structures, where a parent corporation exercises such complete domination over a subsidiary that the subsidiary has no independent identity.
Protecting the Corporate Veil: Best Practices
Business owners can take concrete steps to preserve their liability protection:
Implications for Creditors
For creditors seeking to collect judgments, piercing the corporate veil can be an important tool when a business judgment debtor appears to be judgment-proof but the individual owner has personal assets. Successfully piercing the veil requires establishing the factual predicate through discovery and litigation, which can be time-consuming and expensive but sometimes necessary to achieve a meaningful recovery.
Whether you are a business owner seeking to understand and strengthen your liability protections or a creditor exploring options to collect against a defendant entity, the attorneys at Horgan Law Firm can advise you. Contact us to schedule a consultation.
