Piercing the Corporate Veil
If you are a business owner, shareholder, or director of an entity with limited liability, you must understand what piercing the corporate veil means. Typically, one forms an LLC or other corporate entity to ensure that they will not be held personally liable for any company debts or liabilities. The corporate veil is what provides that protection. And while it is called the corporate veil, its principles generally apply equally to limited liability companies.
But, when a court decides to pierce the corporate veil, they allow a business owner, its shareholders, or its directors to be held personally liable for the debts or misdeeds of a corporation or company.
What Do Courts Look at for Veil Piercing?
Although states may have differing laws, and state and federal courts may apply statutes and case laws differently, there are some general factors that courts look at as they decide whether or not the court should pierce the corporate veil. Some of these factors include: whether or not the business has been undercapitalized or underfunded; whether or not there is a commingling of personal and business assets or funds; if there had been any failure to separate business from personal or other funds; if there appears to be a lack of business assets; if a business owner treats money and assets of the business as their own rather than separate money or assets; if a business fails to issue stock or fails to gain the authority to issue stock; if the business does not keep adequate records or minutes from annual meetings; and if a business is essentially a shell corporation that is being used to avoid personal liability from contract performance, fraud, or a myriad of other possibly unethical or illegal dealings. This list is not exhaustive, but are just some of the factors that courts look at.
Alter Ego and Agency
Corporate veils are frequently pierced under alter ego and agency theories. Under the alter ego theory a veil can be pierced when two conditions are met: 1) The separateness of the company and its owner essentially cease to exist due to misuse of the corporate entity by its member(s); and 2) there was an inequitable result such as services rendered not being paid for. Under the agency theory, a corporate veil may be pierced where either a person or parent corporation exercises so much control over a company or subsidiary that they cannot be seen as two different entities, such that there is no independent existence of the company or subsidiary who’s veil is pierced.
These are somewhat simplified descriptions of the alter ego and agency theories, but it is important you are aware of these two theories as they are frequently used to pierce corporate veils.
Want to learn more?
Cornell Law School Legal Information Institute, Piercing the Corporate Veil, https://www.law.cornell.edu/wex/piercing_the_corporate_veil.
Associated Vendors, Inc. v. Oakland Meat Co., 210 Cal. App. 2d 825 (1962).
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