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What is “piercing the corporate veil?”

On Behalf of | Dec 2, 2015 | Closely Held Businesses |

It is an axiom of business law in Ohio that one of the reasons for incorporating is to minimize the risk of liability to shareholders in the company. But shareholder immunity from liability is not unconditional; under some circumstances it may be possible for a shareholder to be sued for acts that he or she commits under the aegis of the corporate form. This bypassing of the corporation to sue the shareholder directly is referred to as, “piercing the corporate veil.”

Piercing the corporate veil requires the plaintiff to satisfy a three-part test. First, the individual shareholders must have exercised control over the corporation to such a degree that the company no longer can be said to have a separate will or existence of its own as a legal entity (that is, the corporation has become an “alter ego” of the shareholder or shareholders controlling it); second, the shareholder or shareholders exercising that control must have used it to commit a fraud or other illegal act against the person who seeks to pierce the corporate veil; and third, the injury to the plaintiff must have resulted from that wrongful act.

Although this test may sound simple to prove in theory, it must be tempered by remembering that Ohio courts adhere to a judicial philosophy that veil piercing should be a “rare exception” to the general rule of limited shareholder liability. What this means is that the wrongdoing on the part of the shareholders must amount to more than just “unjust” or “inequitable” activities, but rather must be egregious in nature: fraud, or an illegal act. What constitutes a severe enough act to pass this requirement is something that an attorney experienced with business law can help to identify, whether it is on behalf of the plaintiff or the defendant shareholder or shareholders.


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