Piercing the Corp Veil

Question 1

Are shareholders of a corporation personally liable for debts of the corporation?

Answer 1

Generally NO, shareholders of a corporation are NOT personally liable for the debts of the corporation. However, the major exception to this rule is the doctrine of piercing the corporate veil.

Question 2

What is the doctrine of piercing the corporate veil?

Answer 2

Piercing the Corporate Veil: Courts will allow a creditor to pierce the corporate veil and hold a shareholder personally liable for the debts of a corporation when:
1. The shareholder has dominated the corporation to the extent that the corporation may be considered the shareholder’s alter ego (e.g., a shareholder utilizes the corporate form for personal reasons);
2. The shareholder failed to follow corporate formalities;
The corporation was undercapitalized (i.e., inadequately funded at its inception to cover debts and prospective liabilities); OR
3. There is fraud or illegality present.

Question 3

Define Passive Investor Liability.

Answer 3

Once the corporate veil has been pierced, courts generally hold ALL the shareholders liable. However, some courts do not extend liability to passive investors.