Piercing the Corporate Veil

Legal personality and limited liability are two critical features of the modern corporate structure. Although these two features are often described as different, they are in fact two sides of the same coin. The "coin" in this case is the principle of separateness. Legal personality means that the corporate entity stands on its own, independent of its stockholders, such that the debts and other liabilities of the stockholders of the corporation are not the debts or liabilities of the corporation.

Equally important, limited liability (the default rule, provided under 102(b)(6)) means that the debts and other liabilities of the corporation are the debts and liabilities of the corporation and not the stockholders. The separate life of the corporation and the power of limited liability are extremely powerful policy choices that have implications for third parties as well as for corporate decision-makers.

Businesses can, and do, fail. When they do, limited liability means that the costs of that failure will mostly be borne by third party creditors of the firm and not by the directors or the stockholders of the firm. This may create incentives for third parties to careful when dealing with corporations. Before agreeing to a contract with a corporation, it is not uncommon for counterparties to engage in some "due diligence" to investigate the capabilities of the corporation. But, limited liability also creates incentives that improve the liquidity of capital markets and encourage corporate risk-taking - a stockholder can feel free to invest in a risky business, like a start-up, safe in the knowledge that should it fail, the stockholder will not be risking all of her assets, including the college fund she has saved for her kids.

"Piercing the corporate veil" is an equitable doctrine that is the exception to the limited liability rule. In extreme cases, courts may look through the protective barrier of limited liability and assign the corporation's liabilities to the stockholders. The following cases raise of the issues common in veil piercing cases.

Although the concept of corporate separateness is well understood at the state level, in recent years a series of First Amendment cases have provided the US Supreme Court the opportunity to give its own view on the traditional state law question of corporate separateness. Unlike state level courts, the US Supreme Court has taken a much more malleable view towards the doctrine of corporate separateness as that concept relates to the First Amendment.