Liability Of A Corporations Individual Members

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Liability Of A Corporations Individual Members

Limited liability of members in a corporation was created in order to encourage investors to fund the operations of a business while giving shareholders the ability to invest without fear of being held liable for the debts and obligations of the company. Limited liability, therefore, created entities intended to be wholly separate from the individual shareholders.   

"Piercing The Corporate Veil"

As a result of limited liability, the corporation acts as a shield to protect individual shareholders from claimants and creditors seeking to satisfy a judgment against the corporation. Limited liability, however, is not absolute and the limited liability of shareholders in a corporation may be disregarded. Disregarding the independent and separate existence of the corporation is often referred to as "piercing the corporate veil."

"Piercing the corporate veil" is not a cause of action, but is a procedural manuever generally used to demonstrate that the corporation was misused as a vehicle to accomplish wrongful purposes on the shareholder's behalf. If a court determines that the corporation veil has been pierced, then the claimant or creditor can pursue judgment against the assets of the individual shareholder. 

How Is The Corporate Veil Pierced? (The Thee-Prong Test)

Determination of whether or not the corporate veil was pierced will be determined by the law of the jurisdiction in which the corporation was formed. In general, however, most jurisdictions apply the three-prong test. In the three-prong test, there must be a showing that:

  1. a unity of ownership and interest between and among the shareholders and the corporation existed
  2. the separateness between the corporation and the shareholders must have ceased to exist; and
  3. using the limited liability protection as a shield, the shareholders must have used the corporation to perpetuate fraud, criminal activity or wrongful conduct

How Will The Court Determine Whether There Is "Unity Of Interest And Ownership" And Whether The "Separateness Between The Shareholder And Corporation Has Ceased To Exist"?

Factors for determining whether there is a unity of interest and ownership and whether the separateness has been blurred will vary. Typically, however, the following factors will be used to establish the first two prongs of the three prong test:

Will I Need An Attorney To Determine Liability Of A Corporation Member?

Courts will generally not pierce the corporate veil unless the shareholder clearly used the limited liability protection provided by the corporation to engage in actions that are wrongful. If you are suing a corporation and feel that a shareholder is liable and the corporation alone will not satisfy your recovery, then seeking out a corporations attorney who will assist in determining whether or not the corporate veil can been pierced.

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Last Modified: 10-23-2013 01:05 PM PDT

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