Also known as: thin capitalization · thinly capitalised · thin cap · undercapitalized
Written by attorneys · grounded in primary & secondary sources — see below
A corporation possessing capital insufficient to cover the reasonably foreseeable risks and obligations of its business activities.
Theo Thomas formed Topaz Mining with only minimal initial capital to conduct hazardous extraction work. After a major accident generated liabilities far exceeding the company's assets, unpaid creditors sued Theo personally. The court considered the corporation's thin capitalization together with Theo's complete control and failure to maintain separate records when deciding whether to disregard the corporate form.
Tanner Thompson created Terra Financial with only a few thousand dollars in capital to underwrite high-risk policies. After a large claim rendered the company insolvent, the claimant sought to reach Tanner's personal assets. The court evaluated whether the severe undercapitalization combined with transfers of premiums to Tanner's other entities justified piercing the veil.
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No. Undercapitalization is a relevant factor but never sufficient standing alone. Courts require additional evidence that the corporation functioned as the shareholder's alter ego or was used to perpetrate fraud or injustice.
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Siphoning of funds to the shareholder or affiliated entities, failure to observe corporate formalities, absence of records, nonfunctioning officers, and insolvency together with undercapitalization support disregarding the corporate form.
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The court applies a totality-of-the-circumstances test that weighs undercapitalization along with other indicators such as commingling of assets, disregard of formalities, and whether the entity served merely as a facade for the dominant owner.
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No. Creating separate entities for each asset or vehicle is common, but when combined with undercapitalization and evidence of alter-ego operation or injustice to creditors, courts may still pierce the veil.
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