How to Pierce a Corporation’s Veil

Sometimes, things are not what they seem. That’s particularly true in the legal world. Something that looks like a receipt may be a contract. Or a lease may be treated by the courts as a purchase. This column is about when a corporation is not a corporation.

We are all generally familiar with corporations. They are the big, bad villains in all the movies. Actually, they are legal entities created for a business purpose. A person or a group of people can form a corporation. There are for-profit and nonprofit corporations, with different state and federal rules governing each.

A person doing business by himself or herself is responsible for what the business does. In a partnership, the partners are personally responsible. But generally speaking, in a corporation, only the corporation, not the individual shareholders, are legally responsible for company actions.

In other words, individuals are insulated from liability by the “artificial personality” of a corporation.

That’s the general rule, but all rules, particularly in the law, have exceptions. And the exception here is known by the phrase “piercing the corporate veil.” It was coined in a 1912 Columbia Law Review article by I. Maurice Wormser to describe the situation when a court determines that the debt of a corporation ought, in fairness, to be viewed as the debt of the individual shareholder.

When a corporation does not have enough assets to pay off its creditors, a fairly common occurrence in the current economy, it is sometimes possible to go to the corporate veil, the legal protection, and reach through it to the individuals who own the company as shareholders.

It’s not easy to be successful in this maneuver. What sort of facts will help pierce the veil? You’ll have to show that the corporation did not act as a real corporation; for example, that it failed to issue stock shares and maintain proper corporate records, or that corporate funds mingled with shareholder funds.

Other factors that may weigh in your favor: the shareholder treated the assets of the corporation as his own; the concealment and misrepresentation of true ownership; a failure to adequately capitalize the corporation; the diversion of assets from the corporation to the shareholder.

If you are owed money by a corporation, and you think you have a chance to impose liability on shareholders, it would be best to consult an attorney; this is a complicated area of law.

Individuals are sometimes legally responsible for a corporate obligation because they have signed a guaranty. Banks and landlords sometimes require guaranties for corporate obligations. A creditor with a guaranty in hand need not rely on piercing the corporate veil. And when a corporation has sufficient insurance, for example in auto accident claims, there is no need to be concerned about piercing the veil at all.