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Coporate Veil

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THEORY OF PIERCING THE CORPORATE VEIL
Most people form corporations to insulate themselves from liability. The insulation exists because corporations are generally considered by law to be separate and distinct from their shareholders. This protection is often referred to as the corporate veil. While most people who incorporate believe they have no personal liability for the debts of the corporation, this is not always true.
For example, if a corporation or LLC is used to commit a fraud, injustice, or wrong, it shouldn’t protect its owners from liability. Courts may also pierce the corporate veil in taxation or bankruptcy cases. For example, if a corporation that faces obligations to creditors and potential lawsuits has siphoned off its assets through dividends or salaries, courts may find undercapitalization. Such corporations are called shells or shams designed to take advantage of limited liability.
Courts can disregard or pierce the corporate veil in some of these situations where the corporation acts as the alter ego of the shareholders in their dealings with third parties. Alter-ego is the argument that if the limited liability entity is merely treated as an extension of a single person then the entity and individual should be treated as a single individual with no limited liability. In other words, the entity is “dominated” or used as an instrument for a sole individual’s purposes. This is because by law they can be owned and/or managed ie. Dominated by a single person. “alter-ego” theory is also known as the Instrumentality or Domination theory.
Following are some of the factors that courts evaluate when determining whether to pierce the corporate veil: ▪ Whether the funds of the shareholders and corporation have been kept separate or commingled

▪ Whether the corporation follows corporate formalities (maintaining minutes, observing bylaws,

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