Corporations are created, in part, because they allow stockholders to separate their own assets from the corporation’s assets. Shareholders know they are only at risk of losing the money or assets they have invested in the corporation, and nothing more. If stockholders worried that they might be responsible for corporate obligations, fewer would invest. However, if the stockholders use the corporation to perpetuate a fraud or promote injustice, a court may disregard the corporate entity and hold the stockholders personally liable for the corporation’s obligations.
When a court decides to “pierce the corporate veil”, it holds that, contrary to the usual rule, there is no legal separation between a company and the individuals involved, so shareholders are personally liable for the corporation’s obligations. When making this determination, the court will examine many factors, such as: was the corporation undercapitalized, were corporate assets used for personal reasons, were corporate assets commingled with personal assets, were the corporate and personal books kept separately, and were corporate actions properly authorized by the board of directors or the stockholders.