What Is the Veil of Incorporation?

One of the purposes of incorporating is to separate an individual from legal liability of a company. The veil of incorporation ensures that a company is a separate legal entity from its directors and shareholders, thus protecting the personal assets of owners and investors from lawsuits.

Function

Once a company incorporates, it becomes its own legal person, thus a legal entity, separate and distinct from the people who formed, own or invest in it. It then retains its own rights and responsibilities such as owning property or entering into contracts, and it can sue or be sued only in its own name.

Significance

This principle behind the veil of incorporation is known as limited liability. The concept of limited liability protects a company's members while furthering the company's commercial endeavors. The significance of the veil of incorporation is that a shareholder or owner incurs no debt that the business acquires. Furthermore if a company is sued and a judgment is granted against said company, the shareholders only stand to lose the amount that they each invested.

History

In the United States the concept of the veil of incorporation was adopted from English company law. The principles of the veil of incorporation were first illustrated in 1897 in the English case of Salomon v. Salomon, in which it was ruled that subsidiaries within a conglomerate were to be treated as separate entities of the parent company. Prior to this time, people did very little investing because of the personal risk involved. In the United States, many cases involving the question of the veil of incorporation have focused on environmental damage and the responsibility held by parent companies, such as was the case of the United States v. Bestfoods (1998).

Warning

There are situations when the veil of incorporation can be pierced or lifted, thus is not a legal ground for defense. When a company carries on trading with less than 2 members, or when fraudulent or wrongful trading is found to have occurred, action can be taken against individuals of the corporation. Courts have also ignored the veil of incorporation in cases in which companies have been established or used for fraudulent purposes. These types of companies are often referred to as an alter ego, a sham or cloak corporation, and in these cases accountability belongs to the person responsible for the illegal action.

Considerations

Piercing the veil of incorporation is one of the most litigated topics in business law. It is also one of the most controversial. Courts have yet to provide a comprehensive definition of the corporate being and specific circumstances in which the veil can be lifted. To fully protect themselves, shareholders should stay abreast of the financial condition of the corporation as well as be able to maintain that the company has a legal objective.

Resources

• CollierLaw--Piercing the Corporate Veil
• The Veil Doctrine
• Lifting the Veil of Incorporation