Piercing The Corporate Veil Flashcards, test questions and answers

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What is Piercing The Corporate Veil?

Piercing the corporate veil is a legal concept which refers to holding shareholders of a corporation personally liable for the company’s actions and debts. This means that if a corporation is sued, the creditors or plaintiffs can pierce the corporate veil and recover their losses from individual shareholders. This concept has been around since the late 19th century, but it has become more prominent in recent years due to increased corporate fraud and mismanagement.The most important factor in piercing the corporate veil is determining whether there was an abuse of the corporate form. Courts will generally look at three elements: (1) whether there was commingling of personal and company funds; (2) whether proper corporate formalities were followed; and (3) whether there was any misuse of authority by officers or directors. If these elements are present, then courts may pierce the veil and hold shareholders personally accountable for liabilities incurred by their corporations.In order to avoid being held liable as an individual shareholder, business owners should ensure that proper protocols are followed when setting up a corporation or other entity structure such as an LLC or LLP. All money should be kept separate from personal funds, all formalities should be properly observed, and all decisions should be made with care in accordance with relevant state laws. Furthermore, business owners should consult with professional advisors if they have questions about how best to set up their companies to protect individual liability for its debts and obligations. Overall, piercing the corporate veil can have serious consequences for those involved in running businesses with multiple shareholders or partners so it is important to take steps ahead of time to protect oneself against such risks whenever possible. By understanding what factors courts consider when deciding on piercing cases as well as taking precautionary measures such as setting up entities correctly, business owners can help ensure that they won’t be held personally liable for any debts their companies incur down the line.