Behind the Mask

Suppose a small corporation owes you money, won't pay, and you suspect the corporate form is just a sham to protect the owners from having to pay out of their own pockets. Can you get your money out of the owners?

While it's still fairly rare, courts are sometimes willing to "pierce the corporate veil," holding owners personally liable for the debts of the corporation. Two situations especially smack of fraud or injustice sufficient for a court to disregard the corporate entity.

The first is when the corporation is too thinly capitalized, which means the owners of the corporation put very little money into it in the first place. If it's evident that they intended for the funds not to be sufficient to pay reasonably anticipated corporate debts, a court may hold the shareholders personally liable.

The second is when the formalities required of a corporation are ignored. You'd need to show that the owners of the corporation in question failed to treat it like a corporation, with elected officers, separate books and regular shareholders' meetings. You might show that they failed to file required annual reports with the state, or that they mixed business and personal funds.

So yes, it is possible to pierce the corporate veil--but only if you come up with clear evidence that the corporation really is a sham.

This article was originally published in the March 2006 print edition of Entrepreneur with the headline: Behind the Mask.