Minnesota Journal of Business Law & Entrepreneurship
An entrepreneur does not start a new business expecting it to fail. Yet, according to various statistics, most independent start-up businesses fail within the first year, while as many as 90% are no longer in business after three years. This is why the issue of personal liability for the owners of the business is critical. Historically, the entrepreneur could protect personal assets by forming and operating the business as a corporation, recognized by state law as a legal entity separate from the owner of the business for purposes of imposing liability. Although operating a business as a corporation presumptively shields the personal assets of the owners from the claims of the business's creditors, a creditor may ask a court to ignore this liability shield when the corporation is unable to pay its debts and goes bankrupt. Disregarding or, "piercing," the statutory limited-liability shield permits the business debts to be satisfied out of the owner's personal assets. Absent a judicial decision to, "pierce the corporate veil," in this manner, the limited liability created by the applicable corporate statute stays intact and the creditor must shoulder the loss.
John H. Matheson, The Limitations of Limited Liability: Lessons for Entrepreneurs (and Their Attorneys), 2 Minn. J. Bus. Law & Entrep. 1 (2003), available at http://scholarship.law.umn.edu/faculty_articles/106.