Undercapitalization means that a company does not have enough capital to conduct ordinary business operations. Undercapitalization may also lead to the company being unable to pay its creditors. Among other causes, undercapitalization may occur because the company is incapable of generating enough cash flow or accessing financing in the form of debt or equity.
An undercapitalized company may be a favorable factor considered by the court for equitable subordination and piercing the corporate veil. However, courts have recognized that, by itself, undercapitalization is not enough to grant these equitable reliefs.
[Last updated in August of 2021 by the Wex Definitions Team]