Also known as: undercapitalisation · undercapitalize · undercapitalized · undercapitalizing · thin capitalization · inadequate capitalization
Written by attorneys · grounded in primary & secondary sources — see below
A financial condition of a corporation or other business entity in which equity capital is inadequate relative to the foreseeable risks and capital needs of its operations.
Ulysses Maritime formed a separate corporation to own each vessel in its fleet. One vessel corporation received only enough capital to cover scrap value and carried no insurance. After an oil spill caused damages exceeding the vessel's assets, a court considered the subsidiary's undercapitalization as evidence of unity of interest with the parent when evaluating whether to disregard the corporate form.
Uma Underwood incorporated each storefront separately with only minimal initial capital and no liability insurance. After a fire at one location injured a customer and left the store insolvent, the court weighed the undercapitalization together with revenue transfers to a central entity when deciding whether the corporate form should be disregarded.
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Ulf Ulfsson created an undercapitalized shell corporation that failed to observe formalities and carried no insurance. When a creditor sought to reach Ulfsson's personal assets after the shell could not pay a judgment, the court examined whether the entity's undercapitalization supported treating it as a mere instrumentality.
Usman Uddin incorporated each taxi as a separate entity with only minimal assets. After an accident judgment exceeded one corporation's resources, the court held that undercapitalization by itself did not justify imposing personal liability absent proof that the form was used to defraud creditors.
Uriel Urban capitalized each taxi corporation with only minimal assets. After an accident judgment exceeded one corporation's resources, the court assessed whether the pattern of undercapitalization and centralized control showed the entities operated as alter egos for the owner's benefit.
No. Courts hold that undercapitalization by itself does not justify disregarding the corporate form. A plaintiff must also show that the corporation was used to defraud creditors or operated as the alter ego of its shareholders for their personal benefit.
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Courts assess capitalization against the foreseeable capital needs and risks of the specific business. Liability insurance counts as capital, and the entity need not be funded to cover every conceivable liability.
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Undercapitalization is one relevant factor among many. Courts also consider failure to observe formalities, commingling of funds, siphoning of assets, insolvency, and whether the entity functioned as a facade for the dominant shareholder.
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Yes. An undercapitalized shell corporation that fails to observe formalities and is used merely to avoid personal liability may satisfy the unity-of-interest prong and, when combined with injustice, support piercing.
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…; when they hold themselves out as being personally liable for the debts of the corporation ; or when they provide inadequate capitalization and actively participate in the conduct of corporate affairs”. (56 Cal. 2d, p. 579; italics supplied.) Examining the facts of the case in light of the legal principles just enumerated, he…