When lifting the corporate veil, the company loses its liability protections
The protection of a company is not ironclad or impenetrable. A corporation is a legal entity that is separate from its shareholders. This means that the shareholders cannot be held liable for any debts of the business. Nevertheless, there are cases where the courts can pierce the veil if the business owners commit some type of wrongdoing.
For example, if shareholders would mix personal and business assets, a court might pierce the corporate veil by holding owners accountable for the obligations and debts of the business. Corporations and shareholders must ensure full compliance with the state law in order to be protected from lifting the corporate veil. Also, courts might lift the corporate veil in cases where the clear distinction between a corporation and the shareholders becomes blurred. There are two theories regarding the lifting of the corporate veil: the alter-ego theory and the instrumentality theory.
Essentially, lifting the corporate veil means that courts can disregard the corporate form and can look straight to an owner for liability
If fraud or any other criminal activity occurs, owners cannot invoke limited liability protections. When running a business, all assets and money belong to the company and can be seized by creditors in a scenario where the company is not paying the creditors. The corporation, as mentioned before, is a separate legal entity from the shareholders and this is called a veil of incorporation. In Florida, in order to pierce the corporate veil, one must show that the relevant company is only an instrumentality of the owner and that the owner engaged in improper conduct.
The most common way of lifting the corporate veil in company law one can come across involves close corporations
Every corporation must follow the laws of the state of incorporation. The states have adopted different regulations. For this reason, for example, Delaware is the most favorable place to incorporate because of its business-oriented legislation. However, even if laws vary by state, courts usually tend to only remove protections in the case of fraudulent or wrongful actions; the same standard applies to limited liability companies. There are two methods under which a business can become liable under corporate law:
- direct liability (usually regarding direct infringement)
- secondary liability (in the form of indirect violation from agents).
Even if the courts have the possibility of lifting the corporate veil in company law, they are usually reluctant to remove such protections and will only lift them in a case where the statute was violated in some manner or there is fraudulent activity. The courts in general consider themselves bound by the veil of incorporation principle. Therefore, incorporation does not cut off personal liability at all times and in all circumstances. The sanctity of a separate entity is upheld only insofar as the entity is consonant with the underlying policies and laws which brought it into existence.