What to Consider When Piercing the Corporate Veil
The Legal Concept of Piercing the Corporate Veil Explained4 min read
Piercing the corporate veil is a legal concept used to refer to when a court of law determines that a corporation’s separate legal personality should be disregarded in a particular circumstance, based on misconduct or an inappropriate application of the corporate structure. When piercing the corporate veil is requested, it is been a court of law attempts to do in an effort to spread responsibility as necessary. There are several things to consider in these instances when looking at piercing the corporate veil. In this article, we will elaborate on the top 5 things to consider with regards to piercing the corporate veil, with a particular focus on regulations within New York.
The Principle of Limited Liability in Corporate Structures
The primary concept at the heart of corporate structure is that of limited liability. Under a typical corporate entity, the action of one person does not fail to affect any or all of the other members, and generally speaking, none are held liable for any conduct of the other.
The purpose of limited liability is to avoid any personal legal problems for those involved with a corporation, and protect the assets that same corporation holds and the money that the company is responsible for if something should happen after its formation. This applies to many aspects of anyarial law, and the concept of limited liability is largely considered the most important when it comes to piercing the corporate veil.
Implications of Piercing the Corporate Veil
Before entering into a dispute where one seeks to pierce the corporate veil, it is important to consider the implications that it can cause.
When piercing the corporate veil is pursued, it can cause extreme disruption to the continuity of the corporation, its members, and those involved with it. For instance, if a court of law finds that piercing the veil should be done, the directors and members of the entity may be open to lawsuits from dissenting shareholders, creditors, and other third parties. Likewise, if they are found to be personally liable it implies they may face personal bankruptcy risk, or be required to financially liable to parties impacted by the corporation’s conduct.
Regulations Within New York
When seeking to pierce the corporate veil in New York, there are specific considerations to consider.
Under New York’s corporate law, cases ca require a court of law to pierce the corporate veil when it finds that points such as: the corporate entity has acted as a “mere instrumentality” of its members, the corporate form was not used for the purposes of legitimate business, the corporate organization was used for “fraudulent purposes”, or if there were acts that were more generally “unjust and inequitable.”
A key point to note is that although financial difficulty in a corporation may be a sign that piercing of the corporate veil is necessary, this alone does not guarantee that legal action will be taken by a court of law in this regard.
Distinguishing Corporate Structures and Activities
When it comes to piercing the corporate veil, it is important to distinguish between the structure of the corporation and the activities its members may have partaken. Business Lawyers will also note that any finding must be supported by evidence which shows how any improper conduct was approved by the corporation’s entity.
It is important that this distinction is made as attempting to pierce the corporate veil without noticing the difference between corporate structure and activities may lead to failed attempts in a court of law.
The Responsibility of Shareholders and Managers
The concept of limited liability of shareholders and managers of companies is a solid protection granted by the law, nevertheless, with any benefit there is also responsibility. Thus, when it comes to directors’ responsibility and limited liability when it comes to corporate entities, courts of law take into account the obligation of managing companies correctly, and in compliance with all applicable regulations.
Although the wrongdoings of owners, officers, and directors will rarely lead to piercing the corporate veil, when conducted in succession and deemed as furthering wrongful goals or inappropriate objectives, courts can decide to pierce the corporate veil in their favor to stop illegal activities or fraudulent activities.
Seeking Assistance from Local Counsel
When pursuing piercing the corporate veil, it is of the utmost importance to seek assistance from local counsel in order to develop a case that fits the jurisdiction and state law of New York. Cases that involve piercing the corporate veil tend to be complex and require a specialist understanding of legal precedent as well as deep investigative capacity to back up the request.
For those based in New York specifically, they have access to a network of experienced business lawyers on UpCounsel, who have worked with clients ranging from small businesses to the Fortune 1000. Clients of those lawyers have rated and praised their services, and UpCounsel’s lawyers have an average of 14 years of experience that will ensure the best possible outcome for those in need of such legal services.
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