THEORY OF PIERCING THE CORPORATE VEIL
Most people form corporations to insulate themselves from liability. The insulation exists because corporations are generally considered by law to be separate and distinct from their shareholders. This protection is often referred to as the corporate veil. While most people who incorporate believe they have no personal liability for the debts of the corporation, this is not always true.
For example, if a corporation or LLC is used to commit a fraud, injustice, or wrong, it shouldn’t protect its owners from liability. Courts may also pierce the corporate veil in taxation or bankruptcy cases. For example, if a corporation that faces obligations to creditors and potential lawsuits has siphoned off its assets through dividends or salaries, courts may find undercapitalization. Such corporations are called shells or shams designed to take advantage of limited liability.
Courts can ...view middle of the document...
“alter-ego” theory is also known as the Instrumentality or Domination theory.
Following are some of the factors that courts evaluate when determining whether to pierce the corporate veil:
▪ Whether the funds of the shareholders and corporation have been kept separate or commingled
▪ Whether the corporation follows corporate formalities (maintaining minutes, observing bylaws, electing directors).
▪ Inadequate capitalization making the corporation a mere shell, conduit or instrumentality of the shareholders
▪ Non-functioning directors
▪ Whether shareholders are withdrawing funds or assets from the corporation for personal use without justification or documentation
▪ Adequacy of insurance to protect third parties
▪ Did the corporation comply with the law
▪ Was the corporation properly licensed for its intended activity
▪ Whether the corporation conducts all of its business in the corporate name
▪ Have the shareholders placed any of the corporate assets on their personal financial statements given to third parties
While limited liability companies are not required to maintain the same formalities as corporations and the law on the subject is less clear, the veil of protection afforded by the creation of LLCs can still be pierced by a court if the two elements described above are satisfied. A court may also justify piercing the corporate veil if a corporation began to conduct business before its incorporation was completed or directed the corporation's business receipts straight to the controlling shareholder's or shareholders' personal accounts.
Bainbridge, Stephen M. 2001. "Abolishing Veil Piercing." The Journal of Corporation Law 26 (spring): 479–535.
Huss, Rebecca J. 2001. "Revamping Veil Piercing for All Limited Liability Entities: Forcing the Common Law Doctrine into the Statutory Age." University of Cincinnati Law Review 70 (fall): 93–135.
Roche, Vincent M. 2003. "Bashing the Corporate Shield: The Untenable Evisceration of Freedom of Contract in the Corporate Context." The Journal of Corporation Law 28 (winter): 289–312.
Read more : http://www.ehow.com/video_4981800_pierce-corporate-veil.html