Piercing the corporate veil: legal standards and factors

Corporate Veil

Businesses that are incorporated typically shield principals of the corporation from being held personally responsibility for the debts and liabilities of the corporation. However, under special circumstances, those to whom the corporation is liable will attempt to "pierce the corporate veil," the legal term used to describe an action to have the corporation set aside for purposes of the litigation such that personal liability attaches, and personal assets can be reached (Larson, 2004). The facts and circumstances that may result in a piercing of the corporate view depend upon state law (Lawson, 2004), but generally the plaintiff has to prove that the corporation was set up to either perpetrate a fraud, or show that the incorporation was merely a formality and that the corporation never held proper shareholder meetings to distribute profits as dividends (Piercing the corporate veil).

Factors courts take into consideration to determine if a corporation is legitimate may include (Piercing the corporate veil):

Grossly undercapitalization

Failure to observe corporate formalities

Intermingling of assets of the corporation and of the shareholder

Treatment by an individual of the assets of corporation as his/her own

Failure to pay dividends

Siphoning of corporate funds by the dominant shareholder(s)

Non-functioning corporate officers and/or directors

Concealment or misrepresentation of members

Absence of corporate records