Many different kinds of business disputes can arise in the course of running a corporation, including disputes or claims that may result in the “corporate veil” being “pierced.” One of the benefits of a corporation for most business owners is that the corporation is its own distinct entity. As such, the owners or shareholders are not personally liable for the corporation’s actions since the corporation is itself its own legal entity. The limited liability of a corporation is, in fact, one of its major draws, and it is also one of the major benefits of a limited liability company (LLC).
However, there are some situations in which shareholders can be held accountable personally for the liabilities or debts of the corporation. When this kind of liability is incurred, it is known as “piercing the corporate veil.” We will tell you more about piercing the corporate veil in business disputes.
Understanding What it Means to Pierce the Corporate Veil
The Cornell Legal Information Institute (LII) defines piercing the corporate veil as “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.” The LII clarifies that piercing the corporate veil occurs most commonly with close corporations.
While piercing the corporate veil can occur, it is important to keep in mind that courts do not start at this point. Indeed, as the LII underscores, most courts “have a strong presumption against piercing the corporate veil, and will only do so if there has been serious misconduct.”
To be clear, a corporate veil will be pierced by the court, not the party that has filed a lawsuit against the business in which the corporate veil ultimately is pierced. It can happen when the court decides that the corporation’s actions or debts are so serious that it makes sense to hold the shareholders themselves personally accountable.
Scenarios in Which the Corporate Veil Might be Pierced
There are not too many kinds of scenarios in which the corporate veil will be pierced. Some examples of scenarios in which the corporate veil might be pierced may include but are not limited to the following:
- Contract dispute reveals that the corporation has engaged in fraudulent acts;
- Business dispute reveals that the corporation’s funds have been commingled with the personal funds of shareholders;
- Shareholder of a corporation took personal responsibility for a corporate contract or a corporate loan; or
- Shareholders have used corporate assets for personal purposes.
Generally speaking, as an article from the Harvard Law School Forum on Corporate Governance explains, piercing the corporate veil is most often used in situations where there has been some type of fraudulent conduct, including constructive fraud, or in which shareholders have unlawfully taken corporate assets for personal gain. As that article underscores, “if a court becomes convinced that a shareholder or equity investor has, by words or actions, led a counterparty to a contract to believe that an obligation is a personal liability rather than (or in addition to) a corporate debt, then courts sometimes will use a piercing theory to impose liability on the individual shareholder.”
Contact a Santa Fe Business Litigation Attorney for Assistance
If you have questions about a corporate dispute and the possibility of the corporate veil being pierced, an experienced Santa Fe business litigation lawyer at our firm can discuss your situation with you today. Contact Slate Stern Law to learn more about the services we provide to business owners and shareholders in New Mexico.