The courts often use the terminology of “piercing the corporate veil” when they ignore the separate existence of a corporation concerning liability protection or, in other words, eliminate corporate protection. The reason the corporate form or structure provides limited liability protection is that a corporation is viewed by the law as a legal entity, separate and apart from the shareholders who own it. Sometimes, a corporation is called a “fictitious person,” meaning one created or given status by the law, although it is not a “real person.”
There are many legal cases where the courts have honored and preserved the “corporate veil,” thus maintaining the limited liability protection for the shareholders. This is the rule in most cases. However, there are other situations where the courts have “pierced the corporate veil” and found the shareholders personally liable for the corporation’s debts. If a lawsuit is filed against a corporation and its owners/shareholders, then a judge must decide if the corporation’s owners have organized and operated the corporation in a way that creates and maintains the separation between the shareholders and the corporation.
The law provides that if the shareholders of a corporation operate like a corporation by following corporate formalities, then they will be afforded limited liability protection. They could lose the protection if they do not operate like a corporation.