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Piercing the Veil

In: Business and Management

Submitted By realgsdontdie
Words 855
Pages 4
Businesses incorporate for a variety of reasons. Sometimes they do so to get a tax break. Sometimes the owners want to find and attract new investors in the company. The corporate structure can provide more liquidity of ownership interests. But the main reason most companies incorporate is to limit the personal liability of investors in the event of a calamity.

If your firm is representing a plaintiff who has been wronged by a corporation, it is the corporate entity that will be named as the defendant in the lawsuit -- not any of the corporation's principals. Sometimes, however, a pre-lawsuit inquiry of the corporation turns up very little in the way of property to satisfy a judgment, while a similar search performed on the owners turns up plenty of assets. While laws governing corporations do not normally allow you to name the officers, directors or shareholders as parties in a lawsuit, if you suspect there is an ongoing abuse of corporate privileges, you may apply a legal theory known as the "alter ego doctrine" -- or "piercing the corporate veil" -- to reach past the corporation and attach liability to the principals.

When to Apply the Alter Ego Doctrine

Corporations are recognized by the law as "persons." They have a life of their own, and must be kept separate and apart from the humans who own and run them. To maintain this separateness, and thereby protect their owners from liability, corporations need to follow a variety of formalities. (The list is by no means all-inclusive, but illustrates the most commonly breached formalities.) Corporations must, for example:

*Issue stock.

*Hold regular shareholder and director meetings as specified in the bylaws (and maintain meeting minutes).

*Ensure assets are not comingled with those of the stockholders, officers, directors or others and funds not used for non-corporate purposes.

*Show sufficient…...

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