One of the primary benefits of creating a corporate entity is to limit the liability of the shareholders. However, under certain circumstances the corporate entity may be disregarded. This is also known as piercing the corporate veil and is the most frequent method for holding the shareholders liable for the acts of a corporation.
Corporate officers, directors and controlling shareholders have a general fiduciary duty of loyalty and care which should govern all their corporate conduct. Unless they breach that duty by gross negligence or acts in bad faith, they usually will have no personal liability to third parties. In order to pierce the corporate veil, third parties have to show personal wrongful conduct on the part of a company official or director to hold them personally responsible for extra-corporate actions.
Under the doctrine of piercing the corporate veil, the courts may decide not observe the separation of the corporate entity from its stockholders, and it may deem the corporation's acts to be those of the persons or organizations actually controlling the corporation. This is based upon a finding by the court that the corporate form is used to perpetuate a fraud, circumvent a statute, or accomplish some other wrongful or inequitable purpose.
