Piercing The Corporate Veil

Piercing the Corporate Veil

Piercing the Corporate Veil - Most people incorporate primarily for liability protection. When you form a corporation, limited liability company, or similar business entity, a “corporate veil” is created between your personal assets and your business. When properly managed, corporate veils provide significant personal liability protection against lawsuits, creditors, and other disputes. Without the protection of a strong corporate veil, the risks of doing business can be prohibitive.

However, to prevent Piercing Corporate Veil you must do more than merely form a business entity and register it with the state. There are a host of ongoing governance requirements and formalities for business owners. If challenged in a lawsuit, IRS audit, or other action, you must be able to prove that you have a bona fide business entity. You will be challenged to show that you have a real business, not just a sham created to dodge personal liability. Protecting business owners by helping them keep the rules of corporate governance. This is to prevent "Piecing the Corporate Veil".

Piercing Corporate Veil - Officers, directors and controlling shareholders have a general fiduciary duty of loyalty and care which should govern all their corporate conduct. Unless they breach that duty by gross negligence or acts in bad faith, they usually will have no personal liability to third parties.

Third parties have to show personal wrongful conduct on the part of a company official or director to hold them personally responsible, extra-corporate actions which would support application of the legal doctrine known as "Piercing the Corporate Veil."

Under Piercing Corporate Veil, the corporate form is used to perpetuate a fraud, circumvent a statute, or accomplish some other wrongful or inequitable purpose, the courts may decide not observe the separation of the corporate entity from its stockholders, and it may deem the corporation’s acts to be those of the persons or organizations actually controlling the corporation.

Piercing the Corporate Veil can happen when:

  • corporate debt is knowingly incurred when the company is already insolvent;
  • required annual shareholders or board of directors meetings are not held, or other Corporate-Formalities are not observed;
  • corporate records, especially minutes of directors meetings, are not properly or adequately maintained;
  • shareholders remove unreasonable amounts of funds from the corporation, endangering its financial stability;
  • there is a pattern of consistent non-payment of dividends, or payment of excessive dividends;
  • there is a general commingling of corporate activity and/or funds and those of the person or persons who control the corporation;
  • there is a failure to maintain separate offices, the company has little or no other business and is only a facade for the activities of the dominant shareholder who is in fact, the corporate "alter ego."


Piercing The Corporate Veil