Legal Definitions - veil-piercing

Veil-piercing, also known as piercing the corporate veil, is a legal doctrine where a court disregards the usual legal separation between a corporation and its owners (such as shareholders, directors, or a parent company). Normally, a corporation is treated as a distinct legal entity, separate from the people who own or control it. This separation provides limited liability, meaning the owners are generally not personally responsible for the company's debts or actions.

However, in specific circumstances, a court may "pierce the veil" to hold the owners personally responsible for the corporation's obligations or wrongdoing. This extraordinary measure is typically taken when the corporation has been used to commit fraud, evade legal duties, perpetrate an injustice, or when the corporation's separate identity has not been properly maintained.

Here are some examples illustrating when a court might apply veil-piercing:

• Example 1: Misuse of Corporate Funds by an Individual Owner

  Imagine a sole proprietor who incorporates their small landscaping business. While the business is struggling, the owner regularly uses the company's bank account to pay for personal luxury items, family vacations, and private school tuition for their children, rather than keeping personal and business finances strictly separate. When the landscaping company defaults on payments to its suppliers and employees, they discover the company's accounts are empty. A court might decide to pierce the corporate veil, holding the owner personally liable for the company's debts, because the owner treated the corporation's assets as their own, effectively using the company as a personal piggy bank to avoid legitimate business obligations.

• Example 2: Parent Company Using a Subsidiary to Evade Liability

  Consider a large technology conglomerate that creates a small, underfunded subsidiary company to develop a new, high-risk product. The subsidiary has no independent board meetings, shares all its employees and office space with the parent company, and all major decisions are made directly by the parent's executives. When the new product causes significant harm to consumers, leading to massive lawsuits, the subsidiary declares bankruptcy, claiming it has insufficient assets to pay the damages. A court could pierce the corporate veil to hold the parent conglomerate responsible for the subsidiary's liabilities. This would occur if the court finds that the subsidiary was merely a "shell" or "alter ego" of the parent, created solely to shield the parent from the financial risks of the new product, rather than operating as a truly independent entity.