The law views the corporation as a separate "person" with a life of its own and with perpetual existence until dissolution. In order to maintain its separate existence, corporate matters should be treated as distinctly separate from the personal affairs of its officers, directors, and shareholders. Failure to treat the corporation as a separate entity may result in a court "piercing the veil" on the theory that the shareholder has disregarded the corporate existence.
The general rule is the separate identity of a corporation distinct from its stockholders will be honored unless its recognition serves to perpetuate some form of injustice which typically involves a fraud, misrepresentation, or manipulation of the corporation to a creditor's detriment. Diregarding the corporate form or piercing the corporate veil is an equitable remedy imposed only in exceptional circumstances. A plaintiff seeking to impose direct shareholder liability must demonstrate that the corporate form has been intentionally used to violate or to evade a duty and disregard of the corporate form is necessary to prevent an unjustified loss to the creditor." In addition, the person sought to be held liable for the corporate wrongs must be individuals who control or dominate the corporation. See fraudulent conveyances
Inadequate capitalization is an additional act of misconduct which could lead to shareholder liability. Limited capitalization is a factor in determining whether to disregard the corporate entity. Shareholders may also be held liable under various statutory provisions for payment of dividends and other distributions which render the corporation insolvent at the time of the distribution. Commingling corporate assets with personal assets of those shareholders in control may also result in disregarding the entity.
Traditional veil piercing involves holding an individual corporate participant personally responsible for a liability of the corporation. The legal basis for a "reverse pierce" is a recognition that, under certain circumstances, an act of the individual is an act of the corporation. Where a private person so dominates and controls a corporation that such corporation is his alter ego, a court is justified in piercing the veil of corporate entity and holding that the corporation and private person are one and the same.
A court may hold the parent liable for a corpoate obligation of the subsidiary if the facts and circumstance demonstrate an overt intent to disregard the corporate entity of the subsidiary by using to violate or avoid the obligation. Such an intent may be inferred when the actions of the representatives of the corporations in their dealings with the third person manifest serious confusion as to the individual corporate entities to the prejudice of the third person.
There are exceptional situations when it is nevertheless proper to disregard the separate entity of the corporation and fasten liability directly on the corporation's stockholder and in favor of the person dealing with the corporation. by doing so, the court in effect extends the scope of the duty initially owed by the corporation to the person dealing with it so as to impose liability upon the corporation's stockholder in his individual capacity.
The court must have adequate reason to do this. Often the reason given is public advantage, requirements of justice, alter ego, fruad, bad faith, or other wrong. Such cases often mean nothing more than that the violation of duty will result if the enity is not disregarded when the corporate stockholder himself by his overt acts in dealing with the corporation disregards the separate entity of hte corporation to the prejudice of such third person, he can scarcely complain if the court judges him by his conduct and likewise disregards the corporate entity in order to enforce the right owed to the person dealing with that corporation.