Meaning and Scope of Piercing the Corporate Veil

Piercing a corporate veil is an attempt to hold the shareholders or members of a corporation accountable for the corporation’s debt. This concept can be better explained as, when the owner of a business is personally held liable for the liabilities, debts and obligations of the business.

This process is mainly ordered by a legal professional, such as judge to remove the usual legal shield from the shareholders and directors of a company, if they have used their business to commit a fraud against the creditor or executed any illegal act. This allows the creditors to carry out legal proceedings against the individuals rather than the company.

Top 5 Tips about Piercing the Corporate Veil

The first mandatory requirement is about finding out and proving, the fact that the corporate was actually misused to commit frauds or illegal acts. Here are a few factors, which can lead to piercing of the corporate veil:

Under Capitalization This is a situation where a business was not equipped with the required amount of capital for the type of business carried out. However, there is no clear answer for the reasonable amount; it depends on many factors, such as nature of business, size of business.

Corporate Formalities The failure to observe corporate formalities is another factor leading to piercing of the corporate veil. All corporations, excluding a close corporation, are required to observe the corporate formalities.

Frauds and Illegal Acts A court scrutinizes whether a corporation was misused to promote fraud, unlawful activities or unfairness. In case a corporation uses deceptive means to cheat somebody, the court can order for piercing the corporate veil.

Alter Ego Liability In case the corporation is just an alter ego of the owner and the business is being used by the owner as a shell, piercing of corporate veil will be essential.

Harming Others The basic idea of piercing the corporate veil is to stop the abuse of the corporation that causes exploitation and harm to others.