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One of the main benefits of establishing a corporation is the legal protection it affords the owners/shareholders. Because the corporation is its own legal entity, creditors of the corporation are generally not able to seek compensation or damages from the owners personally when the corporation breaches a contract or fails to fulfill its commitments. This protection is not absolute, however: in certain situations, creditors or others who have a claim against a corporation can “pierce the corporate veil” and hold the owners personally responsible for the corporation’s obligations.

What is “Piercing the Veil” and When Is It Likely to Occur?

“Piercing the corporate veil” is a concept that applies most often in situations where a corporation is created and owned by one or only a few individuals. When it appears to a court that the owners of such a corporation have only created the corporation as a “shell” or in order to avoid personal responsibility for their obligations, a court may allow a creditor or plaintiff to “pierce the corporate veil” – that is, penetrate the “shield” that would normally prevent the owners from being held personally responsible – and proceed with an action against the owners directly.

As one might conclude, “piercing the corporate veil” is a rather extreme measure that courts are not likely to permit unless there is rather convincing evidence fraud is taking place or the owners are using the corporate protections to gain some sort of unlawful advantage. Nonetheless, where such evidence is present, courts can authorize the corporate veil to be penetrated as a way of sanctioning business owners whom the court feels have behaved inappropriately.

What Type of Behavior Induces a Court to Pierce the Veil?

Typical scenarios in which an Ohio court will allow a plaintiff or creditor to pierce the corporate veil are situations in which the corporation is engaging in – or attempting to engage in – some fraud, illegal activity, and/or unlawful action. This can be demonstrated through:

  • A corporation that is created without sufficient capital or assets;
  • A corporation that incurs debts or obligations of a personal nature, not directly related to business activities;
  • A corporation that comingles its funds or assets with those of the owner or owners;
  • A corporation that pays unusually large dividends or compensation to the owners or directors at a time when the business is struggling or behind on its debts.

None of these situations “automatically” result in the piercing of the veil: The plaintiff who is attempting to hold the directors and owners of the business personally liable must still demonstrate that the owner(s) or director(s) actively controlled the corporation in such a way as to purposefully commit fraud or unlawful actions.

If you are a business owner and a plaintiff is seeking to pierce the corporate veil and hold you personally responsible for some conduct of your corporation, contact the Cortland, Ohio-based Law Office of John C. Grundy for assistance. We can help you gather the evidence you need to protect your personal assets from exposure. Call our office today at (330) 637-9030 or contact us online for prompt assistance with your situation.