What does “pierce the corporate veil” mean?

Piercing the Corporate Veil

The purpose of incorporating is liability protection, but without taking care to complete each step of the process, the corporation can be disregarded (“piercing the corporate veil”) and the shareholders can be held personally liable. In other words, merely filing Articles of Incorporation and placing them in a binder with fill-in-the-blank Bylaws is not sufficient to accomplish the purpose of incorporating.

California courts evaluate the facts and circumstances of a particular situation, but to “pierce the veil” there are two legal requirements: (1) there must be such unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist, and (2) that, if the acts are treated as those of the corporation alone, an inequitable result will follow.

While “piercing the corporate veil” is viewed by the courts as a drastic remedy, it most often occurs where there are only a few shareholders who fail to complete each step involved in the formation of the corporation.

One California case reviewed many of the circumstances that have been involved in piercing the veil. The following are a few of the factors that can be minimized with a well-formed corporation:

• The key shareholder treats the assets of the corporation as his own
• The failure to issue stock (or authorize the issuance of shares)
• The failure to maintain minutes or adequate corporate records
• The failure to adequately capitalize a corporation
• The total absence of corporate assets
• Disregarding legal formalities