Also known as: grossly undercapitalized · undercapitalization · undercapitalized · undercapitalisation
Written by attorneys · grounded in primary & secondary sources — see below
A factor considered when determining whether to pierce the corporate veil. It consists of a corporation's failure to maintain capital sufficient for the risks and scale of its business undertakings. Courts weigh this factor along with commingling of assets, disregard of formalities, and domination by a controlling shareholder when assessing unity of interest and ownership.
Yuri formed Gate Vessel Corporation with capital equal only to the scrap value of its single ship and routed all revenues through a central management company. After the vessel caused an oil spill, the corporation lacked assets to satisfy Miguel's judgment. The court examined whether the minimal capitalization, combined with centralized control, showed that Gate Vessel functioned without separate existence from Yuri.
Joseph incorporated each storefront separately, including Cedar Shop, with only minimal initial capital and no insurance. Revenues flowed immediately to his central holding company, leaving Cedar Shop insolvent after a fire injured Bruce. The court considered whether the systematic undercapitalization and removal of assets demonstrated that Cedar Shop operated as an instrumentality of Joseph.
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Carlton incorporated each taxicab as a separate corporation capitalized only enough to cover basic licensing. When one cab injured a pedestrian, the corporation held no assets beyond the vehicle itself. The court assessed whether this pattern of undercapitalization across the fleet, absent additional proof of fraud, justified disregarding the separate corporate forms.
Vivienne formed Apex Advisory LLC with one thousand dollars and deposited client funds into her personal account used for mortgages and vacations. After high-risk trades left the LLC insolvent, Ralph could not recover his losses from the entity. The court weighed the extreme undercapitalization together with commingling and asset transfers when deciding whether the LLC lacked any independent existence.
No. Courts require additional proof that the corporation served as an alter ego or that respecting the corporate form would sanction fraud or promote injustice. Undercapitalization is only one factor among several that together may establish the necessary unity of interest.
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Courts also examine commingling of funds, failure to observe corporate formalities, siphoning of corporate assets by the dominant shareholder, insolvency at the time of the transaction, and whether the corporation functioned merely as a facade for the owner's personal operations.
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No. The doctrine is equitable and can support veil piercing even without fraudulent intent when the corporation was so inadequately capitalized that it could never meet its reasonably anticipated obligations.
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…stockholders their defense of limited liability That rule has been invoked even in absence of a legislative policy which undercapitalization would defeat. It becomes more important in a case such as the present one where the statutory policy of double liability will be defeated if impecunious bank-stock holding companies are…