Piercing the corporate veil would seem to be an appropriate course of action in court when there is serious misconduct within the operations of the company. Most of the time, judges attempt to avoid piercing the corporate veil, as it stunts development within public markets and causes individuals to mistrust LLC's. There is no set reason why a judge would pierce the corporate veil, and it varies even more state-to-state. Reasons could vary from under-capitalization to failing to keep minutes or other corporate formalities. When the veil is pierced, all shareholders and owners of the company, acquire the company's debt and they are all required to use personal income and or assets to pay it off. This is very common with corporations with very few shareholders as there is no general board of general directors or formal meetings to ensure proper conduct of the company.
"Piercing the corporate veil" refers to a situation in which courts put aside limited liability and hold a corporation's shareholders or directors personally liable for the corporation's actions or debts.
In what circumstances, does a court feels the need to pierce the corporate veil? Or what factors determine the need to hold the owners responsible?
"https://www.law.cornell.edu/wex/piercing_the_corporate_veil"
Some circumstances where a court may deem piercing the corporate veil necessary include cases where the separation between the business and owner is not clearly defined or legally maintained, or when the actions of the company are considered knowingly wrongful, reckless, or fraudulent.
A less common form of fraudulence would be a companies members create "shell" corporations by depositing and transferring debt to the shell company. When the companies have had to much debt to the extent they can not operate the parent corporation will then finance the operation and take control over the subsidiaries. Making it impossible for creditors to collect what they're owed do to the insufficient funds, then the bank might step in to force collection from the parent corporation.
Piercing the corporate veil is a new concept to me so when I saw this post I was interested and wanted to do a little research. When I think of a veil, I immediately think of the bible and neuroscience. After doing some internet research and reading a few articles, I learned that this concept refers to situations where the courts can put aside “limited liability” and hold the shareholder or directors of the company personally liable for the company’s actions or debts that have been accumulated. The judicial system generally discourages piercing the corporate veil, they will take action if there is a serious misconduct. Interestingly enough, the law differ depending on the state. The five most common ways to pierce the corporate veil and impose personal liabilitiy for corporate debt include: the existence of fraud, wrong doing, or injury to 3rd parties. Failure to maintain the separate identities of the companies, failure to maintain separate identities of the company and its owners or shareholders, failure to adequately capitalize the company, and/or failure to follow corporate formalities.
https://www.law.cornell.edu/wex/piercing_the_corporate_veil
https://www.lexology.com/library/detail.aspx?g=4ff8ebf0-4bca-426e-8273-758140f6d0eb
courts will hold the officers, directors, and shareholders personally liable for corporate obligations.
When there is an unlawful activity or any other type of wrongdoing, courts have the authority to pierce a corporation's corporate veil. I believe there are three main reasons why courts might need to take this action. The lack of a true division between a corporation and its owners may be the primary factor. A court may determine that a corporation or limited liability business is a sham, that it only exists as a piece of paper, or that its owner utilizes it for their own purposes. Anything less than a clean separation between a firm and its owners can raise suspicion. The second justification for a court to get involved is when some Fraudulent actions have taken place as a type of wrongdoing. For instance, a business that engages in dishonest financial operations and carelessly borrows money should not be protected by limited liability. The third and last justification, in my opinion, is when a company's creditors pay an excessive price as a result of the first two justifications.
