Forming a business entity can protect business owners and shareholders from personal responsibility for business debts and liabilities. But not always. In Pennsylvania, holding owners and shareholders personally liable for business activity is called ‘piercing the corporate veil.’ Studies have shown a 37% success rate in veil-piercing cases that go to trial. See Robert B. Thompson, Piercing the Corporate Veil: An Empirical Study, 76 CORNELL L. REV. 1036 (1991).

There is no clear test or well-settled rule for veil-piercing. Fletcher-Harlee Corp. v. Szymanski, 936 A.2d 87, 95 (Pa. Super. 2007) (quoting Advanced Tel. Sys., Inc. v. Com-Net Professional Mobile Radio, LLC, 846 A.2d 1264, 1278 (Pa. Super. 2004)). Courts look to the following factors, in no particular order of importance.

Veil-piercing is more likely where:

[1] a business owner wields such control over the entity that the corporation is an “alter ego” of the entity. See, e.g., Miners, Inc. v. Alpine Equip. Corp., 722 A.2d 691, 695 (Pa. Super. 1998). See also E. Minerals & Chem. Co. v. Mahan, 225 F.3d 330, 333 n.6 (3d Cir. 2000) (veil-piercing requires a ‘threshold showing” that the corporation acted “robot- or puppet-like in mechanical response” to the controlling shareholder’s demands).

[2] the corporate form is a “sham, constituting a facade for the operations of the dominant shareholder.” The Village at Camelback Property Owners’ Ass’n, Inc. v. Carr, 538 A.2d 528, 532 (Pa. Super. 1988).

[3] entities are undercapitalized, fail to adhere to corporate formalities, substantially intermingle corporate and personal affairs, and use the corporate form to perpetrate fraud. Arrowhead Conveyor Corp. v. Giuseppe’s Finer Foods, Inc., 2020 WL 1460815, at *10 (Pa. Mar. 24, 2020).

[4] Finally, separate corporate entities and “will be disregarded whenever justice or public policy demand […]” Ashley v. Ashley, 393 A.2d 637, 641 (Pa. 1978).

It's clear that Pennsylvania veil-piercing law is unsettled. But a good lawyer can use this to your advantage. Whether you are an entrepreneur seeking to protect personal assets, or a creditor seeking to collect from a business, contact us for a free consultation.