Also known as:veil piercing · piercing the veil · pierce the veil · corporate veil piercing · piercing the corporate veil
Written by attorneys · grounded in primary & secondary sources — see below
An equitable doctrine that permits a court to disregard the separate legal existence of a corporation or limited liability company. The doctrine imposes personal liability on owners when the entity functions as their mere instrumentality and adherence to the corporate form would sanction fraud or promote injustice.
Sources & Authorities
How it applies
Common Examples
3
Undercapitalized Shell Used for Personal Expenses
Vito Villarreal formed Vertex Pharmaceuticals with one thousand dollars and used a single bank account for both company trades and his home mortgage payments. He executed all client contracts in his own name and transferred remaining assets to his personal brokerage account after risky investments failed. A client who lost funds sued both the company and Villarreal personally. The court applied the two-prong test and disregarded the entity because unity of interest existed and separate recognition would promote injustice.
Parent Company Control Over Polluting Subsidiary
Vanguard Bank formed a subsidiary to operate a chemical plant and directed all operational decisions from its headquarters. The subsidiary maintained no independent board meetings and followed every directive on waste disposal. After a spill caused extensive damage, regulators sought to hold the parent liable. The court examined whether the parent misused the corporate form to accomplish wrongful purposes before deciding whether to pierce the veil.
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Cases
Study Supplements
United States v. Bestfoods524 U.S. 51, 61–62 (1998)
Multiple Undercapitalized Taxi Corporations
Valerie Voss owned several corporations each holding title to one cab and carrying only the minimum insurance required by statute. She commingled all revenues in personal accounts and ignored corporate formalities for each entity. After a pedestrian was injured by one cab, the victim sued Voss individually. The court considered whether the corporations were operated as a single economic unit whose separate existence would sanction injustice.
What two-prong test determines whether to pierce the corporate veil?+
Courts first examine whether the entity was the alter ego or mere instrumentality of the owner so that unity of interest exists. They then ask whether observance of the corporate form would sanction fraud or promote injustice. Both prongs must be satisfied before personal liability is imposed.
Supporting sources
Does failure to observe corporate formalities alone justify piercing the veil?+
No. Statutes expressly provide that failure to observe formalities relating to management or exercise of powers is not a ground for imposing liability on members. Courts require additional evidence of commingling, undercapitalization, or use of the entity to perpetrate injustice.
Supporting sources
Is undercapitalization by itself sufficient to pierce the veil?+
No. Undercapitalization must be accompanied by evidence that the entity was used to defraud creditors or that adherence to the corporate form would promote injustice. Courts apply a totality-of-the-circumstances test that weighs multiple factors together.
Supporting sources
Can veil piercing apply to limited liability companies as well as corporations?+
Yes. Courts apply the same alter-ego and injustice analysis to LLCs when members treat the entity as a personal extension and use it to shield assets from legitimate creditors.
…defendant actually serviced, inspected, repaired and dispatched them. These facts were deemed to provide sufficient cause for piercing the corporate veil of the operating company — the nominal owner of the cab which injured the plaintiff — and holding the defendant liable. The operating companies were simply instrumentalities for carrying on…