Also known as: piercing the corporate veil · pierced the corporate veil · pierces the corporate veil · corporate veil piercing · disregard corporate entity · alter ego doctrine
Written by attorneys · grounded in primary & secondary sources — see below
A doctrine that permits a court to disregard the separate legal personality of a corporation and hold its shareholders personally liable for corporate obligations. The doctrine applies when a plaintiff shows both unity of interest and ownership between the corporation and its controlling shareholder such that the corporation has no separate existence and circumstances where respecting the corporate form would sanction fraud or promote injustice. Courts evaluate factors including undercapitalization, failure to observe corporate formalities, commingling of assets, siphoning of funds, and use of the entity as a mere facade.
Select any source to read its text and confirm it supports the definition.
Priscilla Parks formed Prism Analytics with minimal capital and used its accounts to pay her personal expenses while ignoring board meetings and record-keeping. When a supplier obtained a judgment against the company that Prism could not pay, the supplier sued Parks individually. The court disregarded the corporate form because the unity of interest and ownership left no separate personality and respecting the fiction would sanction injustice.
Pedro Pacheco controlled Pacific Bank through a single-asset subsidiary that lacked adequate capital and never held formal meetings. After the subsidiary defaulted on a loan, the lender sought to reach Pacheco's personal assets. The court applied a totality test and found inadequate capitalization, siphoning of funds, and nonfunctioning officers sufficient to pierce the veil.
Penelope Price created Platinum Partners as an undercapitalized shell that failed to observe any corporate formalities and existed only to shield her from personal liability on contracts. When a creditor could not collect from the shell, the creditor sued Price directly. The court pierced the veil because the entity was merely an instrumentality and adherence to the corporate fiction would promote injustice.
Preston Pratt incorporated each of his taxis separately with only minimal assets required by law. After one taxi injured a passenger, the passenger sought to hold Pratt personally liable. The court refused to pierce the veil because undercapitalization alone did not show the corporate form was used to defraud creditors or operated as Pratt's alter ego.
Pamela Phillips incorporated each taxi as a separate entity with minimal capital and transferred all revenues to her central management company. After an accident left one corporation judgment-proof, the injured party sued Phillips personally. The court examined whether the structure operated as an alter ego for personal benefit rather than a legitimate risk-allocation device.
Peak Performance owned a subsidiary that conducted all operations from the parent's offices with shared employees and no independent records. After the subsidiary incurred environmental liabilities it could not pay, the plaintiff sought to reach the parent's assets. The court assessed whether the parent so dominated the subsidiary that the two lacked separate personalities.
Courts apply a totality-of-the-circumstances test that includes inadequate capitalization, failure to observe corporate formalities, nonpayment of dividends, insolvency, siphoning of funds by the dominant shareholder, nonfunctioning officers or directors, absence of corporate records, and whether the corporation was merely a facade for the dominant stockholder.
Supporting sources
No. Undercapitalization by itself does not justify piercing absent proof that the corporation was used to defraud creditors or operated as the alter ego of its shareholders for their personal benefit.
…(merging parent and subsidiary for jurisdictional purposes requires an inquiry “comparable to the corporate law question of piercing the corporate veil”). But see 199 N. C. App., at 64, 681 S. E. 2d, at 392 (North Carolina Court of Appeals understood that petitioners are “separate corporate entities . . . not directly responsible for the…
…defendant actually serviced, inspected, repaired and dispatched them. These facts were deemed to provide sufficient cause for piercing the corporate veil
…at least diminished where the parties are subsidiaries of American corporations." Id., at 933. In effect, the Court of Appeals
Supporting sources
A plaintiff must show both unity of interest and ownership such that the separate personalities of the corporation and the individual no longer exist and circumstances where adherence to the corporate fiction would sanction fraud or promote injustice.
Supporting sources
No. Empirical studies show that veil piercing occurs only in close corporations or corporate groups and never in publicly held corporations.
Supporting sources
Courts recognize that single-asset corporations are common in certain industries, but will still pierce the veil when the structure is combined with inadequate capitalization, siphoning of funds, and failure to observe formalities that together demonstrate alter-ego operation.
Supporting sources