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Piercing the Corporate Veil

Typically, shareholders (owners) of a corporation are not personally liable for the activities or obligations of the corporation (excluding the value of their investment in the corporation) unless they personally guarantee the corporation’s obligations.  The same holds true for the corporation’s officers and directors.  The rationale behind this approach is that a corporation is a separate legal entity; therefore, the liability for the corporation’s acts and obligations should remain at the corporate level.

One noted exception to this rule is the concept of piercing the corporate veil.  In instances where the corporate form is so ignored, controlled, or manipulated that it is merely the instrumentality of another (i.e., the individual shareholder or shareholders), courts will pierce the corporate veil and hold the individual shareholders and/or officers personally liable.

In Indiana, there are eight factors considered when deciding whether to pierce the corporate veil: 

1.     undercapitalization;

2.     absence of corporate records;

3.     fraudulent representation by corporation shareholders or directors;

4.     use of the corporation to promote fraud, injustice or illegal activities;

5.     payment by the corporation of individual obligations;

6.     commingling of assets and affairs;

7.     failure to observe required corporate formalities; or

8.     other shareholder acts or conduct ignoring, controlling, or manipulating the corporate form.

While no single factor is controlling, if the aggrieved party can show enough of a connection between the misuse of the corporate form and the harm suffered, courts will pierce the corporate veil and hold the individual owners and/or officers personally liable.  In instances where the corporation has no assets, this can be a very big tool for those seeking recovery.  As such, it very important for business owners and officers to guard against piercing claims by ensuring that proper corporate formalities are followed.