Piercing the veil, also known as "piercing the corporate veil" refers to a situation in which courts put aside limited liability and hold a corporation's shareholders or directors personally liable for the corporation’s actions or debts. Veil piercing is most common in close corporations. This provision prevents a shareholder from using control of a legal person to conceal a fraud, an abuse of rights or a violation of a rule of public order.
While the law varies by state, generally courts have a strong presumption against piercing the corporate veil, and will only do so if there has been serious misconduct. Courts understand the benefits of limited liability, as it "encourages development of public markets for stocks and thus helps make possible the liquidity and diversification benefits that investors receive from those markets."
As such, courts typically require corporations to engage in fairly egregious actions in order to justify piercing the corporate veil. In general this misconduct may include abusing the corporation (e.g. intermingling of personal and corporate assets) or having undercapitalization at the time of incorporation.
This mechanism renders the separate legal personality of the company unenforceable against an injured third party, who can thus seek the personal liability of the shareholder who tries to evade it, by “hiding” under the company’s legal personality, and makes it possible to consider that the patrimony of the company and that of the shareholder form a whole.
In general, creditors have no recourse against corporate shareholders, as long as formalities are satisfied. When, however, the corporation is fraudulently created to escape liability, then creditors may pierce the corporate veil.
Laws regarding the piercing of the corporate veil vary from state to state.
[Last updated in April of 2022 by the Wex Definitions Team]
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