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.
One of the main reasons many form a corporation or limited liability company (LLC) is because they do not want to be held personally liable for business debts that they endure. However, if an owners, director, or majority shareholder uses that corporation as shield for personal debt, courts will hold the owners and shareholder personally liable by “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."
This would occur if the owners, officers, directors, or shareholders do not have a real separation between the corporation and their personal obligations and use the corporations limited liability advantage to their own personal advantage.
If the court determines that the owners, directors, or shareholders are abusing the corporate status and shielding their personal liability with the corporate liability, the court will pierce the corporate veil and hold the owners, directors, or shareholders personally liable. This means that creditors that are owed debt can go after the owner’s, directors, and shareholders personal property to satisfy the debt.
Factors courts consider in determining whether to pierce the corporate veil:
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 considered:
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 were wrongful. If you would like to bring a legal action against a corporation, you should contact an experienced business lawyer for advice and assistance.
Last Modified: 07-28-2014 11:05 AM PDTLaw Library Disclaimer
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