Ask a founder why they incorporated and you’ll usually get some version of the same answer: so that if the startup fails, it takes the company down and not the house. That instinct is legally sound. On registration, a company comes into existence as a separate body corporate under section 119 of the Corporations Act 2001 (Cth), with the legal capacity of a natural person (section 124) — and a shareholder in a company limited by shares is liable only for any unpaid amount on their shares (section 516). The principle is as old as Salomon v Salomon & Co Ltd [1897] AC 22, and Australian courts take it seriously — more seriously, in fact, than courts in most comparable jurisdictions.
So here’s the paradox this article is about: courts almost never “pierce the corporate veil” in Australia, and yet founders lose their limited liability protection all the time. Understanding how both of those things are true is the difference between a corporate structure that actually protects you and one that just feels like it does.
The Common Law Veil: Harder to Pierce Than You Think
“Piercing the corporate veil” means a court disregarding the company’s separate personality and sheeting its liabilities home to the people behind it. In Australia, that is a genuinely exceptional event. The leading statement remains Briggs v James Hardie & Co Pty Ltd (1989) 16 NSWLR 549, where Rogers AJA observed that there is “no common, unifying principle” underlying the occasions on which courts pierce the veil — which is a polite way of saying the categories are narrow, fact-specific and unpredictable.
The clearest category is the sham or façade: a company interposed to evade an existing legal obligation. The classic examples are English — Gilford Motor Co Ltd v Horne [1933] Ch 935, where a former employee incorporated a company to dodge his own non-compete, and Jones v Lipman [1962] 1 WLR 832, where a vendor shuffled land into a company to defeat a contract of sale — and Australian courts apply the same logic. Note the shape of it: using a company to avoid an obligation you already have. Incorporating so that future business risk sits with the company rather than you personally is not a sham. It’s the entire point of the system.
Two things follow for founders. First, a counterparty who simply dealt with your underfunded startup and lost money will almost never get through the veil at common law — undercapitalisation alone is not a piercing ground in Australia. Second, the fact that you control the company, own most of it and are its only director changes nothing. One-person companies are exactly what Salomon protects.
How Founders Actually Lose the Protection
If courts won’t take your limited liability away, what does? Mostly: statute, and your own signature.
1. Personal guarantees — the self-inflicted pierce. The most common way founders become personally liable has nothing to do with veil-piercing doctrine. Landlords, banks, equipment financiers and key suppliers know Salomon as well as anyone, so they contract around it by requiring a director’s guarantee. Sign one and the company’s lease or loan is your debt, company or no company. Guarantees deserve the same scrutiny as any investment document: scope (all moneys or this lease?), caps, expiry on exit, and whether a bank guarantee or security deposit can do the job instead.
2. Insolvent trading. Under section 588G, a director is personally liable for debts the company incurs while insolvent if there were reasonable grounds to suspect insolvency at the time. For a startup burning cash toward a raise that may not land, this is the statutory provision most likely to reach a founder’s personal assets — and it’s why the safe harbour in section 588GA exists, and why engaging with it early matters more than optimism.
3. Director penalty notices. Unpaid PAYG withholding, GST and superannuation guarantee charge can become a director’s personal debt through the ATO’s director penalty notice regime. No court order, no piercing argument, just a statutory mechanism that treats certain company tax debts as personal ones. And the detail that matters most: if the company reported those amounts more than three months late (or never lodged its SGC statements on time), the penalty arrives in lockdown form — payment in full is the only way out, and appointing an administrator or liquidator no longer helps. Lodging on time, even when you can’t pay, is what preserves your options.
4. Phoenixing and creditor-defeating dispositions. Since the 2020 anti-phoenixing reforms, transferring company assets for less than market value in a way that prevents, hinders or delays creditors’ access to them — a creditor-defeating disposition under section 588FDB — exposes the officers (directors included) who caused it to civil penalties — and, where they knew or were reckless as to what the disposition was, criminal liability — under section 588GAB. The “start NewCo, move the IP across, leave the debts behind” play isn’t a clever restructure; it’s the exact conduct these provisions criminalise. If the company is in genuine distress, there are legitimate paths — safe harbour, small business restructuring, or an orderly administration or wind-up.
5. Holding company liability. Limited liability also has a statutory exception between companies: under section 588V, a holding company can be liable for the insolvent trading of its subsidiary. If your structure has grown into a group — an operating subsidiary under a holding company, or local subsidiaries after a flip — the parent’s shareholding doesn’t quarantine it from a subsidiary trading while insolvent.
6. Accessorial liability — liability that never needed the veil. A long list of statutes imposes personal liability on anyone “involved in” a contravention, directors and founders included. Under section 550 of the Fair Work Act 2009 (Cth), a founder knowingly involved in underpayments or sham contracting can be personally ordered to compensate employees and pay penalties — a live risk now that intentional underpayment is also a criminal offence. The Australian Consumer Law works the same way: a director knowingly involved in the company’s misleading or deceptive conduct can be personally liable in damages. And a director who personally commits a tort — signs off the misleading pitch, makes the negligent representation — is liable for it as themselves, company or not.
7. Trustee companies. One structural trap worth naming: a director of a company acting as trustee can be personally liable under section 197 for liabilities the company incurs as trustee where the company’s right of indemnity out of the trust assets has been lost — because of a breach of trust, because the company acted outside the scope of its powers as trustee, or because a term of the trust denies or limits the indemnity. It’s one of several reasons trust structures sit uneasily with venture-backed startups.
What This Means in Practice
The corporate veil in Australia is strong against the arguments people imagine (“you were the company’s only director, so you’re liable”) and porous in the places people don’t look. Protecting your limited liability is therefore mostly unglamorous hygiene: don’t sign guarantees reflexively, and negotiate the ones you must sign; keep PAYG, GST and super lodged and paid before almost anything else; watch solvency honestly and get advice before the cash runs out, not after; never move assets out of a distressed company without advice; sign everything “as director for” the company; and treat employment and consumer law compliance as personal risk management, because statutorily, it is.
Limited liability is a privilege the law grants on conditions. Founders who understand the conditions keep it.
This article is general information only, not legal advice — whether a particular structure or course of conduct puts your personal assets at risk depends on your circumstances. Viridian Lawyers advises Australian founders, startups and investors on corporate structuring, directors’ duties and distressed-company decision-making. If you’re being asked to sign a personal guarantee, or you’re worried about where the company ends and you begin, get in touch.
