Give at least four (4) reasons and in what circumstances the courts will invoke this doctrine? On Piercing the corporate veil.
This is example of how it should be like.
Also, give your opinion to the bellow reasons.
Piercing the veil is a way in which courts will disregard the corporation or LLC’s separate existence. With the entity no longer in the picture, the shareholder or member becomes liable for the business’ debts. There are many reasons why the courts will invoke this doctrine.
1. Courts recognize that businesses lose money. Whether the corporation or LLC was inadequately capitalized (if the corporation never had enough funds to operate, it was not really a separate entity that could stand on its own),
Instead, undercapitalization means that the shareholders or members formed the corporation or LLC without providing it with enough capital to carry out its normal business functions and meet its reasonably anticipated obligations.
2. Another reason is if the business assets used by the shareholder or member for personal purposes.
If the shareholders or members use the business’ asset for personal purposes this is a sign that they are not respecting its separate existence. An example would be where the company car is used to run personal errands.
3. Were the corporation or LLC’s funds used for personal expenses? Or whether the corporation or LLC engaged in fraudulent behavior. Using the corporation or LLC’s bank account to pay personal expenses is a major red flag for the courts. It not only indicates a disrespect for the entity’s separate existence but is often one of the main reasons why the corporation or LLC could not pay its debt to the creditor.
4. There is a failure to follow the compliance requirements of the governing business entity statute.
Especially in the case of a corporation, a court will look to see if formalities were followed, such as holding shareholder and director meetings, issuing stock, keeping minutes, and documenting the actions taken. Although an LLC can be run more informally, evidence that meetings were held, records were kept, and business actions documented, does show a respect for the LLC’s own existence.
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