Understanding The Corporate Veil
Posted on: 18 March 2020Share
One of the main arguments for establishing a proper corporation instead of carrying on without incorporation is to receive a degree of personal protection against the losses and liabilities of the business. When corporate lawyer service providers talk about this sort of situation, they sometimes refer to it as the "corporate veil." Let's take a look at what the corporate veil is and what some of its implications are.
A corporate veil is established once an enterprise is validly incorporated. This affords the company's officers protection against liability for the firm's losses. If it went into bankruptcy liquidation, for example, there would be limits to how far creditors could go to collect the company's debts. The assets of the business could be used to satisfy the creditors, but once those were sold by the trustee, that would be the end of the creditors' claims. Creditors would be unable to go after the personal assets of the officers.
A similar sort of protection arises when the company is found liable for things that occurred during its normal activities. If the company was on the wrong end of a product liability lawsuit, for example, a lien could only be placed against the corporate assets. Once those were exhausted satisfying the settlement or judgment, there would be no further remedy for the plaintiff.
Every corporate lawyer in America will tell you, however, that the veil does not represent blanket immunity or an unbreachable limit on bankruptcies and damages. Courts regularly do what is called "piercing the corporate veil." This means voiding the protection because the conduct of the company or at least one of its officers either abused the privilege or isn't covered by it.
Suppose someone created a company just to front a load of debts for personal use. This would violate the intent of forming a corporation, and consequently, it would likely drive the court to treat wrongdoings and debts behind the veil as personal actions.
Likewise, the corporation itself may ask the court to peel back the veil because of the conduct of an officer. If an individual officer's actions were outside the scope of the company's charter, that officer wouldn't be allowed to hide debts and liabilities behind the veil. Depending on the circumstances, the corporation may even assist outside parties or the government in pursuing action against the offending individual. In extreme cases, the conduct could even be treated as criminal fraud.
To understand more about the corporate veil and how to keep your business protected, talk to a corporate lawyer in your area.