Limited liability is the point of forming an entity, and courts disregard it sparingly. When they do, the reasoning is usually that the entity was not operated as one.
The tests vary by state but converge on two questions: was there such a unity of interest between the owner and the entity that separate personalities no longer existed, and would respecting the separation sanction a fraud or produce an injustice?
Factors courts weigh: commingling of funds; failure to observe formalities; undercapitalisation at formation for the business undertaken; treating company assets as personal; absence of records; the entity being a mere facade or instrumentality; and siphoning of funds by the owner.
Two points are frequently misunderstood. Undercapitalisation alone is rarely enough — most small businesses are thinly capitalised. And the second element requires more than an unpaid debt; if it did not, every unsatisfied judgment would pierce.
Related doctrines often matter more in practice: successor liability, where a purchaser of assets may inherit obligations if the transaction is effectively a continuation of the seller; fraudulent transfer, where assets were moved to defeat creditors; and direct claims against an owner for their own conduct, which do not require piercing at all.
For business owners, the protection is maintained by ordinary discipline: separate accounts, documented decisions, contracts signed in the entity’s name, and adequate capital and insurance for the risk actually run.