When we think about an incorporated company we normally think about the advantage of incorporating our business to have the protection of not being personally liable for the business’s debts and liabilities. This means that the creditors are only able to look at the company’s assets to recover the money owed by the company. If there are insufficient assets in the company to satisfy the amount the creditors are owed then unfortunately it is there loss. As they are unable to get anything further from the personal possessions of the directors or the shareholders of the company. This protection is called the “corporate veil”.

However, under certain circumstances this “corporate veil” is lifted or pierced, in which the personal possession of the directors can be reached. This is usually done where some civil litigation has been taken against the company. The reason for the litigation must be to call in to question the company, for example the company committing fraud under the corporation protection or the corporation was set up to provide an “alter ego” for the director but the corporation is not a separate entity.

Law varies from state to state, therefore so does the reason for lifting the corporate veil. A lawyer should be consulted in this type of matter in order to advise you on the best course action for that particular state as not only will the lawyer take into consideration the state law but also the facts of the is important to consult with a qualified lawyer when evaluating whether the corporate veil may be pierced in any specific case.

The courts will look at several factors before piercing the corporate veil as follows: -

1.  Formalities – Was the corporation formed in accordance with the legislation. They will look at the meeting that has been held in corporation and it’s financial books and reports that have been submitted.

2. Individual Control – What amount of financial interest, ownership and control do the directors maintain over the corporation?

3. Personal Use – Did the directors use the corporation to advance personal purposes?

After looking at these factors the court believes that the interests of the shareholder and the corporation can not be separated or defined clearly or that it is obvious that it is inappropriate for the corporation to continue trading, the court will then lift the corporate veil and the directors will be personally liable to the creditors.

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Fraud

A court will lift the corporate veil to prevent a fraud, where the corporation is found to be a business meant to facilitate fraud against third parties. If the corporation was set up, for example, to shield its owners from liability over a fraudulent real estate deal, and the owners draw out the assets from the corporation, in order to evade paying any compensation to the fraud victims. The if there are insufficient assets due to the above behavior the court will again lift the corporate veil to allow the victims to recover compensation from the personal assets of the owners.