Corporation
CHAPTER ONE
Introduction
1.1 Background
One of the primary benefits of creating a corporate entity is to limit the liability of the shareholders. However, under certain circumstances the corporate entity may be disregarded. This is also known as piercing the corporate veil and is the most frequent method for holding the shareholders liable for the acts of a corporation.
Corporate officers, directors and controlling shareholders have a general fiduciary duty of loyalty and care which should govern all their corporate conduct. Unless they breach that duty by gross negligence or acts in bad faith, they usually will have no personal liability to third parties. In order to pierce the corporate veil, third parties have to show personal wrongful conduct on the part of a company official or director to hold them personally responsible for extra-corporate actions.
Under the doctrine of piercing the corporate veil, the courts may decide not observe the separation of the corporate entity from its stockholders, and it may deem the corporation 's acts to be those of the persons or organizations actually controlling the corporation. This is based upon a finding by the court that the corporate form is used to perpetuate a fraud, circumvent a statute, or accomplish some other wrongful or inequitable purpose. A court may pierce through the veil of liability protection if the corporation does not follow proper corporate formalities, if it is undercapitalized, or if it can be shown that it is a sham that was set up to defraud.
If the corporate formalities are not followed, the corporation may be deemed to not be functioning as a corporation, but rather, as the alter ego of the owners. To prevent the corporate veil from being pierced, it is important to keep minutes of the board meetings and to not co-mingle bank accounts. These measures help to ensure that the corporation will be treated as a separate entity.
1.2 Research Problem
The major question to be addressed is:
What
Introduction
1.1 Background
One of the primary benefits of creating a corporate entity is to limit the liability of the shareholders. However, under certain circumstances the corporate entity may be disregarded. This is also known as piercing the corporate veil and is the most frequent method for holding the shareholders liable for the acts of a corporation.
Corporate officers, directors and controlling shareholders have a general fiduciary duty of loyalty and care which should govern all their corporate conduct. Unless they breach that duty by gross negligence or acts in bad faith, they usually will have no personal liability to third parties. In order to pierce the corporate veil, third parties have to show personal wrongful conduct on the part of a company official or director to hold them personally responsible for extra-corporate actions.
Under the doctrine of piercing the corporate veil, the courts may decide not observe the separation of the corporate entity from its stockholders, and it may deem the corporation 's acts to be those of the persons or organizations actually controlling the corporation. This is based upon a finding by the court that the corporate form is used to perpetuate a fraud, circumvent a statute, or accomplish some other wrongful or inequitable purpose. A court may pierce through the veil of liability protection if the corporation does not follow proper corporate formalities, if it is undercapitalized, or if it can be shown that it is a sham that was set up to defraud.
If the corporate formalities are not followed, the corporation may be deemed to not be functioning as a corporation, but rather, as the alter ego of the owners. To prevent the corporate veil from being pierced, it is important to keep minutes of the board meetings and to not co-mingle bank accounts. These measures help to ensure that the corporation will be treated as a separate entity.
1.2 Research Problem
The major question to be addressed is:
What