Also known as:two pronged approach · two-prong approach · two prong approach · two-pronged test · two prong test · two-prong test
Written by attorneys · grounded in primary & secondary sources — see below
A judicial test consisting of two required elements. The first element examines whether a corporation functioned as the alter ego or mere instrumentality of its shareholder, demonstrating unity of interest and ownership. The second element examines whether respecting the corporate form would sanction fraud or promote injustice.
Sources & Authorities
How it applies
Common Examples
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Undercapitalized Training Academy
Tobias Thomas formed Maple Peak as a youth sports academy with only nominal capital and no separate assets. He deposited all registration fees into his personal account, paid expenses from the same account, and never filed corporate tax returns. After a participant injury led to unpaid rent on a leased facility, the landlord sued Thomas individually. The court applied the two-pronged approach, found complete unity of interest through commingling and ignored formalities, and concluded that respecting the form would promote injustice by leaving the creditor without remedy.
Comparative Fault in Auto Design
Tiana Tan formed an undercapitalized LLC to hold her auto-repair business. She commingled all receipts in her personal account and ignored filing requirements. After a customer obtained a judgment the LLC could not pay, she was sued individually. The court applied the two-pronged approach, found unity of interest through complete disregard of formalities, and held that respecting the form would promote injustice by shielding her from the creditor.
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Cases
Study Supplements
Daly v. General Motors Corp.20 Cal.3d 725, 575 P.2d 1162, 144 Cal.Rptr. 380
Vibration Injury from Hand Tools
Tori Taylor formed a nominal shell corporation to operate her tool-distribution business. She treated all corporate assets as her own and left the entity undercapitalized. After a supplier obtained an unpaid judgment, the supplier sued Taylor personally. The court applied the two-pronged approach, found the entity was merely her instrumentality, and concluded that observing the corporate form would sanction injustice.
Potter v. Chicago Pneumatic Tool Co.694 A.2d 1319, 1332, 1334-1335 (Conn. 1997)
Common questions
Frequently Asked
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What are the two prongs of the test for piercing the corporate veil?+
The first prong requires a showing that the corporation was the alter ego or mere instrumentality of the shareholder, establishing unity of interest. The second prong requires a showing that respecting the corporate form would sanction fraud or promote injustice.
Supporting sources
Does failure to observe corporate formalities alone justify piercing the veil?+
No. The two-pronged test requires both unity of interest and a showing that the corporate form would sanction fraud or promote injustice. Informal practices must be accompanied by undercapitalization or commingling that leaves creditors without remedy.
Supporting sources
How does the two-pronged veil test interact with an unanticipated business downturn?+
An external downturn does not automatically defeat the second prong. If the corporation was undercapitalized from the start and treated as a personal instrumentality, respecting the form still promotes injustice by allowing the shareholder to escape obligations incurred while operating the business.
…the respective contributions as a definitive percentage of this total fault. This court had occasion recently to set forth a two-pronged test for determining the existence of a product made defective by virtue of its design. The court held that a product is "defective in design either (1) if the product has failed to perform as…