Question

From "Foundations of the Legal Environment of Business"

Explain “piercing the corporate veil.” In your answer explain how this can happen. Additionally, explain who might benefit from this and why some might not

Answer 1

“Piercing the corporate veil” means a situation in which courts make a corporation’s shareholders personally liable for corporation’s wrong actions or debts and put aside limited liability benefit giving of shareholders or directors in limited liability corporations. It is most common in corporation which is close.

It can happen only in following situations-

1. When there is existence of fraud, wrong doing or injustice to third party.

2. When company fail to maintain separate identities of several related affiliated companies and they act under that one company

3. When company fail to maintain separate identities of the company and its shareholders

4. Failure to adequately capitalize the company

5. Fail to follow corporate formalities

The individuals and third parties who were negatively affected because of the fraud by the shareholders or directors of the company will get benefit from piercing the corporate veil.

Shareholders or directors of the company will not get benefit instead they will be liable to pay for debts and their wrong doings. They will not be benefited because they are the culprit of someone’s loss of money and mental stress.

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