The act of formal business formation serves multiple purposes. Business formation can offer tax benefits and protection from financial and legal liability for the individual starting the business. Corporations, in particular, are a business structure commonly used by those who don't want to incur financial liability for the failure of the business or of the products or services they provide.
When your company finds itself in a financially difficult position because of faulty components, undelivered orders of materials or another significant failure by a company on which you rely for supplies, distribution or other key components of your business, you could suffer extreme financial hardship that could even lead to the failure of your business.
Sometimes, it becomes necessary to take legal action when the failure to follow through on a contract or agreement by one company impacts the solvency of another business. Taking legal action in such situations can lead to complex legal cases against the business, while other times, you need to direct such actions at the owner of the business, which can require additional legal steps.
Unscrupulous businesspeople may hide behind their business structure
Sometimes, the failure to follow through on a promise to a client or customer is the result of internal problems with the business that the owner or manager would have no way of predicting or avoiding, such as a workplace accident that results in the loss of several of their most experienced staff members to short-term disability leave.
Other times, companies can engage in practices that impact their ability to fulfill their obligations to others knowing that those actions could hurt others. If the profit incentive is strong enough, people can often do unscrupulous things.
The person who runs or owns the business could then attempt to avoid liability and financial responsibility by dissolving the corporation, restructuring it or filing bankruptcy on behalf of the business.
Provided that the business organization was part of a plan to defraud others or if it acted for profit over the public good, piercing the corporate veil may become a viable option. The courts can decide to set aside the protections of incorporation and hold the owner or shareholders accountable.
What does an alter-ego or piercing the veil proceeding involve?
In the event that someone unscrupulously uses the structure of their business to avoid fulfilling their contractual obligations to others, it is possible for the courts to sometimes hold individuals accountable for the financial impact of their decisions through the business.
For example, a corporation held by a sole individual may be subject to proceedings attempting to pierce the veil if that individual made fraudulent business contracts with financial consequences for others. Piercing the veil or bringing alter-ego proceedings against someone who has sole ownership of a business, or has the controlling interest in a corporation or structured business, can give you an opportunity to see compensation when you might not otherwise have an option.
By holding the business owner personally financially responsible, you may have more opportunities to recover your financial loss then you would by taking direct action against the corporation itself.