Question

ESSAY QUESTION

One of the chief advantages of a corporate structure for organizing and operating a business is the concept of “limited liability.” What is meant by “limited liability?” What is the corporate veil and how does it protect the shareholders? What is meant by “piercing the corporate veil,” and under what circumstances can the veil be pierced?

Answer 1

In general limited liability is liability of the business owner is limited to the amount that the he has invested on company. It is the legal protection available for the shareholders of publicly or privately owned company under which the financial liability of each shareholder for the company's debts , financial losses & obligations are limited to the par value of his/her fully paid up shares

The corporate veil is a legal concept which separates the actions of an organization to the action of shareholder , also it protects shareholders from being personally liable for the company's action or debt & other financial losses. It does not necessarily mean that the protection is always in place. A court decides wether they hold shareholder responsibility for the company's action or not. Piercing the Corporate Veil is situation in which the court set aside limited liability & hold a company's investor or the director personally liable for company activities , debts or financial losses. Corporate veil piercing is common in closed corporation . The law may be varies by state, generally courts have strong presumption against piercing the corporate veil and will only do so if there is signs of serious misconduct. The following are the circumstances in which the corporate veil can be pierced:

• When Company tries to avoid Legal Obligations
• Where the Public Policy is need to be Protected
• Where the Company is a Clock which means to disguise or pretend.
• Where the Welfare Legislation is Avoided
• Where the Character of the Company is to be Determined
• Where it is essential to Protect the Interest of the Revenue
• Where a Fraud is Suspected