“Piercing the corporate veil” is a legal doctrine that, in some cases, allows the individual owners of a corporate entity to be held personally liable for corporate debts. Generally, the corporate structure prevents creditors of the corporation from holding the owners legally liable. For example, if a company buys inventory on credit but ultimately defaults on paying for the inventory, the owners cannot be sued by the supplier. However, as noted, in some cases, the “corporate veil” can be “pierced,” allowing the supplier to “reach” the assets of the individual owners of the company. These same general legal principles apply to Amazon aggregator companies.
Amazon aggregators are businesses that buy Amazon sellers and their accounts. The general idea is to consolidate those seller accounts and use efficiency of scale to increase market share and profitability. However, Amazon aggregators tend to be small, closely-held companies that may “play fast and loose” with the corporate rules. If that happens, the individual owners of an Amazon aggregator company may end up being legally liable for debts and obligations of the company.
Piercing the corporate veil is a mostly judge-made set of rules, and the general idea is preventing fraud and misuse of the corporate forms. Corporations and other corporate entities are separate legal entities. As such, various and numerous legal requirements must be met for a corporation to maintain its separate legal status. For example, a corporation must have a board of directors that actually meets to decide what the company should do. This is an example of a “corporate formality” that must be honored for a court to deem the corporation a separate legal entity. Thus, one way that a court will pierce the corporate veil is if the owner (or owners) fails to comply with the corporate formalities. In that case, the court will say that there is a “unity of interest and ownership” between the individual owners and the corporate entity so that they are not really separate. This is often phrased as whether the corporate entity is a “mere facade” for the individuals. When that happens, then the court will pierce the corporate veil.
Another justification for piercing the corporate veil is to prevent fraud. Even when the corporate formalities are met, some individuals may be able to use the corporate structure to commit fraud. Courts will evaluate this possibility.
With these legal principles in mind, courts will consider a large number of factors when asked to pierce the corporate veil. These include:
- Whether the company had adequate capitalization
- Did the company actually issue stock certificates or other ownership documents?
- Failure to observe corporate formalities, including the holding of board meetings, keeping of board minutes, etc
- Did the company pay dividends?
- Did the company become insolvent or go bankrupt?
- Were all the directors involved in running the company?
- Commingling of funds — was there a separate corporate bank account?
- Diversion of assets from the corporation to the owners
- Failure to maintain arm’s length relationships among related entities
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