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Piercing the Corporate Veil

One of the primary purposes for forming a corporation, or other limited liability business entity, is the limitation of liability that it affords its owners. The separate limited liability nature of a corporation mandates that shareholders enjoy limited liability for the debts and obligations of the corporations. In other words, they are at risk only to the extent of their equity investment or capital contribution.

As you can imagine, this principle has been abused. Individuals formed corporations for the sole purpose of avoiding liability, thus causing inequity in many circumstances. The law and courts will only respect a corporation’s limited liability nature if it follows corporate formalities. Accordingly, a Court will hold the owner(s) of a corporation personally liable if it perceives that owner(s) do not treat the corporation like a corporation at all times. A court will pierce the corporate veil after weighing the following factors:

(a) whether the corporation has a board of directors; (b) whether there are regular meetings of its board and/or shareholders; (c) whether detailed, nuanced corporate records are kept; (d) whether corporate funds are kept separate from personal funds; (e) whether there exists corporate officers with clearly defined roles.

The basic rule of thumb is as follows: if you own a corporation you must follow all corporate formalities. A court upon inspection will only respect its limited liability if you treat it like a corporation. Failure to properly adhere to this principle can result in large amounts of personal liability.

See my post Corporate/Business Successor Liability for a related issue.

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