Individuals, acting by themselves or with a group, are generally responsible for their actions; that is, they have general liability for their actions. By forming an entity such as a limited liability company or corporation, each individual in the group can shield himself from general liability, can limit his liability to his investment in the entity. The states permit—or even promote—this as a means of encouraging individuals to take risks and start businesses.
However, under certain circumstances, the limited liability of the entity can be lost; and general liability can extend to its owners. This is known as “piercing the corporate veil” or “piercing the entity veil.” As is the case with many legal issues, the reasons for piercing the entity veil are complicated and vary from state to state. To compound the problem, there are few statutes that govern this issue; individual state law is primarily derived from common law and court decisions.