Also known as: shell companies · shell corporation · shell corporations · dummy company · front company · paper company
Written by attorneys · grounded in primary & secondary sources — see below
A corporate entity that lacks substantial assets or ongoing business operations. Such an entity functions as an instrumentality of its controlling shareholder when the owner commingles funds, ignores corporate formalities, and undercapitalizes the company from inception. Courts disregard the separate existence of the entity when these facts establish unity of interest and show that honoring the corporate form would sanction fraud or promote injustice.
Randall formed Fair Stay to operate a boutique hotel but contributed only minimal capital. He deposited all room revenues into his personal account, paid both business and personal expenses from the same funds, issued no stock, and kept no corporate records. When Fair Stay could not pay its contract obligations to Premier Hotels after an economic downturn, the court disregarded the entity because Randall had used it merely to avoid personal liability.
Maria formed Apex Services as a nominally capitalized LLC with no separate bank account. She used the entity to contract with vendors while paying all business expenses from her personal funds and maintaining no records. When Apex could not pay its suppliers, the court pierced the veil because Maria had treated the company as a mere instrumentality to shield herself from liability.
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Courts examine undercapitalization from inception, commingling of personal and corporate funds, failure to observe formalities such as issuing stock or keeping minutes, and use of the entity solely to avoid personal liability. When these facts demonstrate unity of interest between shareholder and corporation, the first prong of the veil-piercing test is satisfied.
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No. Undercapitalization is an important factor but insufficient alone. Plaintiffs must also prove that the owner disregarded separateness in a manner that would promote injustice if the corporate form were respected.
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Injustice arises when creditors extended credit in reliance on the apparent corporate entity and are left without recourse because the owner deliberately left the entity judgment-proof. The second prong is met when the structure was used to evade known obligations rather than to conduct legitimate business.
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