Also known as:piercing the corporate veil · pierce the corporate veil · pierces the corporate veil · pierced the corporate veil · veil piercing · corporate veil piercing
Written by attorneys · grounded in primary & secondary sources — see below
An equitable doctrine that permits a court to disregard the separate legal personality of a corporation and impose liability on its shareholders. The doctrine requires proof of both unity of interest and ownership between the corporation and its owners and circumstances in which adherence to the corporate form would sanction fraud or promote injustice.
Sources & Authorities
How it applies
Common Examples
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Commingled Funds and Undercapitalization
Pablo Perez formed Paragon Construction to handle a single renovation project. He deposited all project payments into his personal account, paid corporate bills from the same account, and left the company with only a few hundred dollars in capital. When a supplier obtained a judgment against Paragon, the court disregarded the corporate form because the commingling and undercapitalization showed no separate existence and respecting it would allow Perez to escape payment.
Siphoned Revenues and Insolvency
Portia Price incorporated each of her retail stores separately with minimal capital and no insurance. She routed all store revenues through a central entity she controlled, leaving each store unable to pay its debts. After a customer obtained a judgment against one store for injuries caused by a known hazard, the court pierced the veil because the totality of circumstances showed the stores functioned as facades for Price's personal operations.
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Cases
Hornbooks
Shell Entity Avoiding Liability
Pedro Pacheco created Premier Manufacturing as an undercapitalized shell to hold a single factory. He ignored all corporate records and used the entity solely to shield himself from tort claims. When a worker injured at the factory obtained a judgment, the court disregarded the corporate form because the entity was merely an instrumentality and respecting it would promote injustice.
Undercapitalization Without Fraud
Penelope Price incorporated each of her taxicabs as a separate corporation with only enough assets to cover scrap value. After one cab injured a passenger, the passenger sought to reach Price personally. The court refused to pierce the veil because undercapitalization alone did not show the corporate form was used to defraud creditors or operated as Price's alter ego.
Alter Ego With Commingled Assets
Pauline Porter formed a holding company that owned several operating subsidiaries. She routinely transferred funds between the entities without documentation and treated all assets as her own. When a creditor obtained a judgment against one subsidiary, the court pierced the veil because unity of interest was shown and respecting separate existence would promote injustice.
Instrumentality Used to Avoid Debts
Peter Pratt incorporated each new venture with minimal capital and no records. He siphoned all revenues to himself, leaving the entities insolvent. After a supplier won a judgment against one entity, the court disregarded the corporate form because the entities were mere instrumentalities and adherence to the fiction would sanction injustice.
Common questions
Frequently Asked
4
What two elements must a plaintiff prove to pierce the corporate veil?+
A plaintiff must show unity of interest and ownership so that the corporation and its owners have no separate personalities, plus circumstances in which respecting the corporate form would sanction fraud or promote injustice. Courts examine factors such as commingling of funds, failure to observe formalities, undercapitalization, and siphoning of assets.
Supporting sources
Is undercapitalization alone enough to pierce the veil?+
No. Undercapitalization by itself does not justify piercing absent additional proof that the corporation was used to defraud creditors or operated as the alter ego of its owners for their personal benefit.
Supporting sources
What role do corporate formalities play in a veil-piercing analysis?+
Failure to observe formalities is one relevant factor among many. Courts consider it along with other indicia of domination such as commingling, undercapitalization, and asset siphoning when deciding whether the entity lacked a separate existence.
Supporting sources
How does the alter ego theory differ from fraud-based veil piercing?+
The alter ego theory focuses on whether the corporation was merely an instrumentality of its owners with no independent existence. Fraud-based piercing requires a showing that the corporate form was used to perpetrate a specific fraud or injustice on creditors.
Supporting sources
509 U.S. 764, 817, 113 S.Ct. 2891, 125 L.Ed.2d 612 (1998)Conflict of Laws
…at least diminished where the parties are subsidiaries of American corporations." Id., at 933. In effect, the Court of Appeals pierced the corporate veil in weighing the interests at stake. I do not think that was proper. [11] The Court skips directly to subsection (3) of § 403, apparently on the authority of Comment j to § 415 of the…
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