Question

Courts will occasionally determine in a the course of a lawsuit against a corporation that the usual limited liability protections for shareholders will be set aside, imposing liability on individual shareholders or entities that exist behind the corporation. This is called _____.

Answer 1

Answer: b. piercing the corporate veil.

Explanation:

Normally, corporations have limited liability which means that the assets of the shareholders are separate from that of the company and should the company go bankrupt for instance, the assets of the shareholders would be safe and only that of the company could be liquidated.

Sometimes however, the courts can remove this limited liability protection which would enable the assets of the shareholders to be targeted in what is known as "piercing the corporate veil".

There are several reasons this can happen for instance:

• Fraud by the owners
• Failure to follow formal corporate rules
• Inadequate capitalization of the company
• Use of company assets as private assets.