Piercing the Corporate Veil

Question 1

Generally, are shareholders personally liable?

Answer 1

Generally, shareholders of a corporation are NOT personally liable for the debts of the corporation.

Question 2

How many reasons do courts have to pierce the corporate veil?

Answer 2

4

Question 2

How can a court pierce the corporate veil?

Answer 2

Courts will allow a creditor to pierce the corporate veil and hold a shareholder personally liable for the debts of a corporation when:
1. The shareholder has dominated the corporation to the extent that the corporation is the shareholders alter ego (e.g., a shareholder utilizes the corporate form for personal reasons).

2. Shareholder failed to follow corporate formalities;
3. The corporation was underfunded from its inception; OR
4. Fraud or illegality is present.

Question 3

Once the corporate veil has been pierced can passive investors be held liable?

Answer 3

Once the corporate veil has been pierced, courts generally hold ALL the shareholders liable. However, some courts do not extend liability to passive investors.