Also known as: siphon · siphons · siphoned · siphoning of assets · siphoning of funds · asset stripping · fund diversion
Written by attorneys · grounded in primary & secondary sources — see below
The improper withdrawal of corporate assets by a dominant shareholder or member for personal use. Courts treat this conduct as one factor in a totality-of-the-circumstances test for deciding whether to pierce the corporate veil and impose personal liability.
Sarah Sullivan formed Sapphire Holdings with minimal capital and used the company to operate a trucking business. After several profitable months she transferred the bulk of the company's cash into her personal brokerage account to pay for a family vacation home. When a creditor sued on an unpaid equipment lease, the court examined the transfers as evidence that Sapphire Holdings functioned merely as an extension of Sullivan's personal finances.
Spencer Silver, the majority owner of Sterling Dynamics, withdrew substantial corporate cash reserves into his personal accounts rather than leaving the funds available for company operations. He used the money to finance unrelated personal investments. Minority shareholders sued, alleging that Silver had siphoned corporate assets and that the corporation should recover the diverted sums.
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Samantha Stone and her brother, the only active directors of an insurance brokerage, directed client premiums into their personal accounts instead of the company's trust account. The company became insolvent and could not pay claims. A bankruptcy trustee sought to hold the siblings personally liable, citing the repeated transfers of corporate funds.
Sylvia Santos owned several single-taxi corporations. She collected all fares into her personal account and left each corporation with only enough cash to meet minimum insurance requirements. After one of the cabs injured a pedestrian, the victim sought to pierce the corporate veil, pointing to Santos's systematic removal of corporate revenue.
Siphoning occurs when a dominant shareholder or member withdraws corporate funds or assets for personal use rather than for legitimate corporate purposes. Courts list this factor alongside undercapitalization, failure to observe formalities, and insolvency when deciding whether the entity is merely a facade.
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No. Courts require a combination of factors under the totality-of-the-circumstances test. Siphoning is relevant but must be weighed with other indicators such as inadequate capitalization and disregard of corporate formalities before the veil will be pierced.
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Legitimate compensation or dividends are paid according to corporate formalities and in proportion to ownership or services rendered. Siphoning involves irregular, undocumented transfers that leave the corporation unable to meet its obligations while benefiting the controller personally.
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Yes. When a controlling shareholder diverts corporate opportunities or assets, minority owners may bring both a direct claim for breach of loyalty and a request to pierce the veil so that personal assets become reachable.
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…exceptions.” Meinhard v. Salmon , supra, 249 N.Y. 458, 464, 164 N.E. 545, 546, 62 A.L.R. 1. The actions of defendants in siphoning off for personal gain corporate advantages to be derived from a favorable market situation do not betoken the necessary undivided loyalty owed by the fiduciary to his principal. The…