The Separate Corporate Entity: Privilege And Its Limitations; Piercing The Corporate Veil

AuthorJames D. Cox/Thomas Lee Hazen
ProfessionProfessor of Law at Duke University/Professor of Law at the University of North Carolina, Chapel Hill
§ 7.1 The Corporate Entity
Recognition of a corporate personalit y generally is considered to be the
most distinct attribute of the corporation.1 To speak of a corporation as
a legal person is a convenient figure of speech used to describe the
corporation as a legal unit, a separate concern with a capacity, like a
person’s, to hold property and make contracts, to sue and be s ued, a nd to
continue to exist notwit hstanding changes of its sha reholders or members.
If A, B, and C are incorporated into the A, B & C Co., the entity
in its corporate capacity is the holder of the rights and liabil ities arising
from the transactions of the company. The property or rights acquired,
or the liabilities incurred on behalf of the corporation, are treated as the
property rights and liabilities of the corporate legal person distinct from
those of the shareholders who comprise it.2 A contract entered into by the
shareholders of a corporation is not the contract of the corporation un less
adopted by authority of its directors. Thus, if a sole shareholder borrows
money on a personal note secured by shares of stock for the company’s
use and benefit even though the money is used to pay off cor porate bills,
the corporation is not liable on the note when credit was extended to the
sole shareholder.3 A corporation and its sh areholders are not liable on each
other’s contracts. Shareholders’ immunity from corporate obligations
is one of the most important incidents and advantages of t he separate
legal entity and serves a useful purpose in business life. Under some
circumstances, however, sufficient equity may be shown to disregard the
distinct legal personality and thereby pierce the corporate veil.
§ 7.2 Piercing the Corporate Veil—Approaches
Used to Disregard the Corporate Entity
In general, a corporation may exist and act as an entity or legal un it
separate and apart from its shareholders. In many cases, however, the
courts place lim itations on this priv ilege. These limitations usually are
expressed in terms of “disregard ing the corporate fiction,” “piercing the
corporate veil,” or “looking at the substance of the business operation
rather than at its form.”4
The disregard of the corporate entit y occurs in a var iety of set-
tings, the most common being to impose personal liabilit y on the cor-
poration’s stockholders. If the corporation is insolvent, its unsatisfied
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