Is the corporate veil protection in jeopardy?

The recent SCOTUS Hobby Lobby decision has many business owners worried about their corporate shield. But why?

In recent weeks, the phrase "piercing the corporate veil" has made headlines amid the U.S. Supreme Court Hobby Lobby decision released this past June-particularly among the business community.

But what is it and why should companies be concerned?

Piercing the corporate veil

The corporate veil, as it's known, is essentially the shield against personal responsibility for the liabilities of a business. It is a big reason why individuals create such entities; they are seeking protection from any personal liability for problems that arise from the business's transactions.

But in certain instances, courts will pierce this veil-and allow a company's creditors to go after personal assets of the owners, directors, or shareholders. However, certain circumstances must be present before courts will allow the pierce.

For example, if a court determines that there is no real separation between the owner of a corporation and the entity itself, liability could be imposed. Personal bank accounts and other assets could be at risk.

This particular instance is garnering attention amid the recent SCOTUS Hobby Lobby decision.

The potential repercussions of the Hobby Lobby decision

Two family-owned corporations-Hobby Lobby and Conestoga Wood Specialties filed a lawsuit arguing that the mandate under the Affordable Care Act that requires certain businesses pay for health insurance to cover contraceptive protection for female employees violates the company's religions principles under both the Free Exercise Clause under the First Amendment as well as the Religious Freedom Restoration Act of 1993. RFRA, as it's referred to, is a law that prohibits the government from placing a substantial burden on a person's exercise of religion.

The Supreme Court agreed and ruled in favor of the plaintiffs. Corporations with religious principles that are forced to provide contraception coverage simply impose a substantial burden on their religious liberties.

But corporations are entities, not "persons" as referenced under RFRA. So how is this violation possible?

"In order to exercise its newfound religious freedoms, a corporation must import religious beliefs from a real person or a group of people," one corporate law professor from SMU recently interviewed by NPR stated.

So if there is no distinction between the corporation's owners and the entity itself, has the veil been torn?

Possible-according to some experts. Since the Court has allowed the religious beliefs of Hobby Lobby's owners to extend to the corporation, the corporation has therefore collapsed and the veil disappears.

And Justice Alito seems to agree. "A corporation is simply a form of organization used by human beings to achieve desired ends," he wrote in the opinion.

The future of the corporate shield

Such an argument is food-for-thought; piercing the corporate veil is rare. However, it does happen. The latest ruling may offer ammunition for creditors looking to pierce a corporation's veil in the future and implement personal liability of a company's debts or responsibilities.

Keywords: Corporate liability, piercing the corporate veil, U.S. Supreme Court ruling