This protection, however, is not absolute. In certain rare circumstances, a court can “pierce the corporate veil.” This is a legal action that sets aside the protection of limited liability and holds the shareholders personally responsible for the corporation’s debts. A court will only take this drastic step if it finds that the corporate structure has been abused to perpetrate a fraud or injustice.

The grounds for piercing the corporate veil typically involve a finding that the corporation was not a truly separate entity, but was merely the “alter ego” of its owners. The factors a court will consider include:

• Commingling of Funds: Did the owners treat the corporate bank account as their own personal piggy bank?
• Failure to Follow Corporate Formalities: Did the company fail to hold board meetings, keep corporate records, or issue stock?
• Undercapitalization: Was the corporation set up with so little capital that it was never intended to be able to meet its financial obligations?
• Fraud: Was the corporation used to defraud creditors or commit other illegal acts?

Piercing the corporate veil is an exceptional remedy, but it serves as a powerful reminder that the legal protections of the corporate form are contingent upon respecting the formalities that give it its separate legal identity.

The legal framework for creating corporations and the principles of limited liability are defined in the corporate and commercial laws of nearly every country. For example, in Indonesia, this is governed by the Law on Limited Liability Companies.