Black-letter propositions
- 01
The board ordinarily authorizes share issuance for permitted consideration; watered-stock liability can reach improper issuance.
- 02
Preincorporation subscriptions may be temporarily irrevocable under statute; postformation subscriptions are contracts.
- 03
Share classes, preferences, conversion, redemption, and preemptive rights depend on articles and governing statute.
- 04
A shareholder is not ordinarily personally liable beyond investment.
- 05
Veil piercing considers unity of interest, undercapitalization, commingling, ignored formalities, misuse, and whether respecting the entity would promote fraud or injustice; contract and tort contexts can differ.
- 06
Enterprise and reverse-piercing theories are exceptional and jurisdiction dependent.
Use this attack sequence under time
Frame the issue
Identify entity, shareholder, obligation, and capitalization.
Resolve the next checkpoint
Review articles and board action.
Resolve the next checkpoint
For veil piercing, prove domination plus misuse and causal injustice.
Finish the conclusion
State which owner and which obligation are affected.
Common wrong turns
- Failure to follow one formality is rarely enough alone.
- Limited liability is the rule, not an equitable suggestion.
- An LLC can also face veil piercing despite fewer required formalities.
Worked example
A sole shareholder commingles all funds, leaves a hazardous business intentionally undercapitalized, and uses the company to evade known liabilities.
The combination of domination and misuse causing injustice strongly supports veil piercing, especially for an involuntary tort claimant.
Practice this topic
Limited liability and its exception
Cornell says one of the primary benefits of incorporating is limited personal liability, so generally the only personal assets a shareholder can lose to corporate debts is the investment in the corporation. Piercing the corporate veil is when courts put aside limited liability and hold shareholders or directors personally liable. Cornell says courts have a strong presumption against it and do so only for serious misconduct, most often in close corporations.
Misconduct can include intermingling personal and corporate assets or undercapitalization at incorporation. When a corporation was fraudulently created to escape liability, creditors may pierce.
State variation and the outline
Cornell notes the tests vary by state. Florida requires that the corporation be the alter ego or mere instrumentality of the shareholder and that the shareholder engaged in improper conduct. Alaska uses a disjunctive or a conjunctive test on excessive control and corporate misconduct.
NCBE's outline lists financing the organization as sources of finance, securities issuance and characteristics, dividends and distributions, and redemptions and repurchases, and it lists piercing the veil as its own topic.
State tests Cornell describes
Cornell lists Nevada's three-part test: the corporation must be influenced and governed by the person asserted to be its alter ego, there must be such unity of interest and ownership that one is inseparable from the other, and adherence to the fiction of separate entity must sanction a fraud or promote injustice. Its Alaska summary describes a disjunctive test and a conjunctive test on excessive control and corporate misconduct.
Frequently asked questions
What is the controlling rule for shares, subscriptions, issuance, and veil piercing?+
Owners ordinarily have limited liability, but domination plus misuse causing fraud or injustice can justify piercing for a particular obligation.
What is piercing the corporate veil?+
Courts putting aside limited liability to hold shareholders or directors personally liable for the corporation's actions or debts, according to Cornell.
Do courts pierce the veil often?+
No. Cornell says courts have a strong presumption against it and act only where serious misconduct is shown.
What kinds of misconduct support piercing?+
Intermingling personal and corporate assets, undercapitalization at incorporation, or creating the corporation fraudulently to escape liability.
Which corporations are most affected?+
Veil piercing is most often applied to close corporations, according to Cornell's entry on the doctrine.
Do all states use the same veil-piercing test?+
No. The law varies by state, with Florida, Alaska, Nevada and New York each described differently in Cornell's summary.