⚡ 10-Second Rule
Owners normally lose only what they put in — unless they treated the company as a costume, and honoring the costume would cheat someone.
🧒 ELI-10 Scene
Theo runs a dog-walking business with its own money jar. If the business owes the pet store $50 and the jar holds only $20, the store normally can't touch Theo's allowance. That's the deal that makes kids brave enough to start businesses. But suppose Theo never put real money in the jar, paid for video games from it, and mixed his allowance in whenever he felt like it. The jar was never really separate — it was Theo in a jar costume. Now his parents make him pay the store from his own pocket.
⚖️ Actual Rule
A shareholder is not personally liable for the corporation's obligations merely by being a shareholder. MBCA § 6.22(b). Courts pierce the corporate veil — disregard the entity and reach the owners — only as an equitable exception, typically requiring (1) such unity of interest and ownership that the corporation is the shareholder's alter ego or mere instrumentality, and (2) that respecting the separate entity would sanction fraud or promote injustice. Recurring factors include grossly inadequate capitalization at formation, disregard of corporate formalities, commingling of corporate and personal assets, siphoning of funds, and use of the form to perpetrate a wrong. No single factor is sufficient, and mere ownership of all shares — even of many parallel corporations — does not itself justify piercing. Walkovszky v. Carlton, 223 N.E.2d 6 (N.Y. 1966). Courts pierce more readily for tort claimants, who never chose their debtor, than for contract claimants, who could have investigated or bargained for guarantees. Related doctrines: reverse piercing reaches the corporation's assets for an owner's debt, and enterprise liability aggregates sister corporations run as a single business. Piercing reaches the shareholders who abused the form; it does not impose liability on directors or officers as such.
ELI-10 translation: the money-jar wall stands unless the owner never respected it and someone would be cheated by pretending it exists.
🔍 Ask These Questions
- Start with the baseline: shareholders are not liable. (The store normally gets only what's in the jar.)
- Was the company an alter ego? (Was the jar really just the owner's pocket with a label?)
- Check the factors: capitalization, formalities, commingling, siphoning. (Empty jar from day one? Mixed money? Skipped the rulebook?)
- Would honoring the entity work a fraud or injustice? (Would keeping the wall up reward a cheat?)
- Is the claimant in tort or contract? (A person hit by the truck never chose the jar; a lender did.)
- Right target? (Piercing grabs the owners who abused the jar — not managers just for managing.)
⚠️ Bar Trap
Exam language: Examinees pierce the veil whenever a corporation is insolvent, wholly owned, or thinly staffed. Insolvency plus sole ownership is the norm, not an abuse; piercing demands alter-ego facts plus fraud or injustice, and courts treat it as an extraordinary remedy — especially against a contract creditor who could have protected itself.
ELI-10: An empty jar and a single owner aren't cheating — that's just a small business that failed. Look for mixed money, a jar empty from day one, or a trick.
🧪 Question
Sylvie was the sole shareholder, director, and employee of Lanternfly Pest Control, Inc. She funded the corporation at formation with capital adequate for its projected operations, kept separate corporate bank accounts and records, held required annual meetings, and never used corporate funds personally. After two profitable years, a regional competitor slashed prices, and Lanternfly failed owing $40,000 to Chemco, a supplier that had sold it chemicals on unsecured credit. Chemco sued Sylvie personally for the debt, arguing the veil should be pierced because Sylvie was the sole owner and the corporation is now insolvent.
What is the likely result?
(A) Sylvie is liable, because a sole shareholder who manages the business is the corporation's alter ego. (B) Sylvie is liable, because leaving a creditor unpaid is itself an injustice justifying piercing. (C) Sylvie is not liable, because sole ownership plus insolvency, without abuse of the corporate form, does not support piercing. (D) Sylvie is not liable, because the veil may never be pierced in favor of contract creditors.
Answer: (C). Lanternfly was adequately capitalized, observed formalities, and kept assets separate; it failed from competition, not manipulation. Sole ownership and later insolvency are exactly what limited liability contemplates, and Chemco, a voluntary creditor, could have demanded a guarantee.
💡 Why the Wrong Answers Are Wrong
- (A) equates sole ownership and active management with alter-ego status; both are lawful and routine without disregard of the entity's separateness.
- (B) collapses the injustice element into mere nonpayment; every piercing case involves an unpaid creditor, so more — fraud, commingling, siphoning — is required.
- (D) overshoots in the other direction; contract creditors face a harder road, but piercing remains available on proper facts.
- ELI-10: The misconception is thinking "company broke, owner pays." The whole point of the jar is that owners usually don't — unless they faked the jar.
