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

• Author: James D. Cox/Thomas Lee Hazen
• Profession: Professor of Law at Duke University/Professor of Law at the University of North Carolina, Chapel Hill
• Pages: 86-97

§ 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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