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ComplianceMarch 25, 2022

How to avoid piercing the corporate veil between parent corporations and their subsidiaries

There is no more important doctrine in the law of corporations than the one stating that a corporation has an existence separate and apart from its shareholders. It is this separation that encourages capital investments by minimizing the shareholders’ risk of loss.

The doctrine applies equally to individual shareholders and to corporations that own other corporations (e.g., parents and subsidiaries). And, in fact, corporations of all sizes use the parent-subsidiary structure to expand their operations and invest in new ventures. Because the subsidiaries have their own existence, they are responsible for their own debts and liabilities, and their parents‘ risk is limited to their investment.

However, under certain circumstances, a court may disregard the subsidiary’s separate existence and treat the parent and subsidiary as one. When a court does this, it’s called piercing the corporate veil.

Standards applied in piercing the corporate veil cases

Courts are aware of the importance of the separate existence of corporations and shareholders and are therefore reluctant to pierce the corporate veil. However, they will disregard a subsidiary’s existence to hold the parent responsible for the subsidiary’s debts and liabilities when a failure to disregard would bring about an inequitable result.

Courts across the country use somewhat different standards in determining whether to pierce. But, in general, a court will pierce the corporate veil where the parent so controlled and dominated the subsidiary, and their affairs were so intermingled, that fairness dictates that the acts of the subsidiary be considered the acts of the parent. This is often referred to as the subsidiary being an “alter ego” of the parent. Most courts also require that there be an element of injustice and unfairness in addition to domination and control.

Five alter ego doctrine factors

An analysis into piercing the corporate veil is very fact intensive. There are a number of factors the courts look at in determining whether the subsidiary is merely an alter ego of the parent. No one factor is determinative, and in most cases, it takes a combination of factors being present before a court will find that the subsidiary is the parent’s alter ego.

Although the factors can vary from court to court, they generally include the following:

  1. Whether the subsidiary was adequately capitalized when formed and solvent enough to pay its anticipated debts when conducting business. Undercapitalization and insolvency are factors that indicate an alter-ego relationship.

  2. Whether the subsidiary had functioning officers and directors. Some overlap of management between the parent and subsidiary can be expected. Therefore, the test is whether the subsidiary’s officers have the power to run the business independently. In particular, the courts look at whether the parent makes decisions that ordinarily would be made by the subsidiary, such as the hiring and firing of employees.

  3. Whether the subsidiary observed corporate formalities. Here, the courts look at whether the subsidiary held duly noticed director and shareholder meetings, kept minutes and other books and records, issued stock, had bylaws, etc. The courts also look at whether the subsidiary complied with the provisions of its governing corporation law — such as by filing annual reports, paying franchise taxes, and maintaining a registered agent and registered office.

  4. Whether the parent’s assets and subsidiary’s assets were kept separate. The test here is whether the parent treated the subsidiary’s cash, property, and other assets as if they were the parents. Commingling of assets is frequently cited by courts as evidence of an alter-ego situation.

  5. Whether the parent held the subsidiary out as being a part of it, rather than a separate corporation. Here, the courts consider representations made by the parent about the subsidiary (particularly to the plaintiff) and other factors such as whether they had the same office address, telephone number, email address, and employees.

Elements of unfairness or inequity

Evidence of domination and control is typically not enough for a court to pierce a subsidiary’s corporate veil. Courts also look for a wrongful or unjust act that injured the plaintiff. And the fact that the subsidiary could not pay the plaintiff’s debt is not enough. Something more is required — such as if the parent intentionally siphoned the subsidiary’s funds in order to prevent it from paying the debt, or the parent formed the subsidiary to engage in the wrongful act that injured the plaintiff, or the parent directed the subsidiary to take the action that caused the loss to the plaintiff.

Avoid having a court pierce the corporate veil

Just as there is no one factor that will cause a court to pierce the corporate veil, there is no one action a parent corporation can take to ensure the court will not pierce the corporate veil.

However, if the parent and its subsidiaries take the following actions, it can help mitigate the risk of a court piercing.

  1. Make sure subsidiaries are adequately capitalized when formed and to the extent possible, remain solvent.

  2. The subsidiary’s management should be responsible for its day-to-day operations. They should not have to obtain the parent’s approval before making decisions in the ordinary course of business.

  3. The subsidiary should observe corporate formalities and comply with the requirements of the governing corporation statute.

  4. The subsidiary’s assets should be kept separate from the parents. The subsidiary should have its own bank account and its own books and records.

  5. Document inter-company transactions. If the parent loans money to the subsidiary, or vice versa, it should be recorded on the books as a loan. Transactions between the parent and subsidiary should be negotiated at arm’s length, and the terms should be fair to both corporations.

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Variations on the piercing the corporate veil theme

Subsidiary LLCs

Corporations also own subsidiary LLCs. Courts will pierce the veil of an LLC, and generally apply the same standard. For example, was the LLC the parent’s alter ego, and was there an element of injustice or inequity. However, some courts will look at slightly different factors in the alter ego analysis, in recognition that LLCs are typically managed more informally than corporations. There are also some LLC statutes that outline factors courts may look at in making a veil-piercing analysis.

Personal jurisdiction cases

Although most piercing the corporate veil cases are brought by plaintiffs seeking to hold the parent liable for a subsidiary’s debt, there are also many cases in which the plaintiff is seeking to pierce so that the parent will be subject to the forum state’s personal jurisdiction.

In these cases, the subsidiary is subject to the court’s personal jurisdiction but the parent is not. So if the court pierces the subsidiary’s veil, its activities or citizenship will be imputed to the parent, thereby giving the court personal jurisdiction over the parent. Courts generally apply the same standard as in the piercing for liability cases, although some courts may be more lenient considering that piercing will not necessarily result in liability for the parent.

Reverse piercing

Piercing the corporate veil involves the plaintiff asking a court to disregard the subsidiary’s existence. However, in some cases, plaintiffs ask the court to disregard the parent’s existence. This is called “reverse piercing the corporate veil”.

There are two types of reverse piercing cases. One is insider reverse piercing — where it’s an insider of the parent corporation, or the parent itself, seeking to pierce the parent’s corporate veil. Although somewhat rare, there are instances where it would be to a parent’s advantage to pierce its own veil. For example, in workers’ compensation cases, where the subsidiary employer was immune from suit, and the employee sought to hold the parent corporation liable for additional damages, parents have sought to pierce their own veil to have the subsidiaries’ immunity imputed to them. Courts rarely reverse pierce where it is the parent requesting it, and some courts will not even entertain attempts to insider reverse pierce.

The second type is outsider reverse piercing — where a creditor of the parent seeks to hold the subsidiary liable. Courts are more willing to entertain outsider reverse piercing claims and will generally apply the same test they would apply if it was the subsidiary’s separate existence being challenged.


The parent-subsidiary structure is a very common and useful way of doing business. It encourages expansion and innovation by minimizing the parent corporation’s risk of loss. However, it is important for parent corporations to respect the separate existence of their subsidiaries. If they don’t, they could lose their limited liability by having a court pierce the subsidiary’s veil.

Sandra Feldman
Publications Attorney
Sandra (Sandy) Feldman has been with CT Corporation since 1985 and has been the Publications Attorney since 1988. Sandy stays on top of the most pressing and pertinent business entity law issues that impact CT customers of all sizes and segments.
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