Personal Jurisdiction-Piercing the Veil
Piercing the veil can be defined as holding directors, members, owners or shareholders personally accountable for any business debts. That is, it is as a situation in which the courts find owners or managers of limited liability companies or corporations legally responsible for any fraudulent business transactions (Cornell University Law School 1). Notably, business owners usually form companies such as corporations in order not to be personally blamed in cases debts or inability to pay creditors. As such, there are normally three conditions that should be justified before a court pierces the veil on managers or shareholders. These conditions are discussed below.
Firstly, courts will pierce the veil if company actions were fraudulent or wrongful. Business owners can irresponsibly or dishonestly use company money to make fraudulent business deals (Fitzpatrick 1). Such scams are usually for personal financial gains to the shareholders or owners. For example, a company owner can illegally use money from the sales department to order substandard products. If the court is able to prove that owners fraudulently did such transactions, then it could pierce the veil.
Secondly, piercing the veil could occur in instances where owners comingle personal and business or corporation assets (Cornell University Law School 1). In such cases there are usually no real separation between owners’ assets and company assets. In addition, such cases are caused by lack of legal and formal separation of assets. For example, a shareholder could pay personal electricity bills from the business account leading to a mix up of personal and company financial affairs.
Thirdly, courts might pierce the veil in cases where creditors suffered lose (Fitzpatrick 1). This means that a person who did business transactions with a company was left unpaid for services rendered. If such can be proved by a court of law, it might decide to pierce the veil. Considering these conditions, veil piercing can be avoided by undertaking legal formalities, documenting business transactions, paying creditors and separating personal assets from business ones.
Cornell University Law School. Piercing the Corporate Veil. 25 September 2009. Web. 5 May 2016.
Fitzpatrick, Diana. Piercing the Corporate Veil: When LLCs and Corporations May be at Risk. Web. 5 May 2016.