Hobby Lobby and the corporate veil

In corporate law, there are few more important concepts than that of the “Corporate Veil.” This is the concept that protects shareholders from unlimited liability for the debts of the corporation.

The corporate veil is what protects a small business owner’s home and personal assets where they are also the sole corporate owner when their business suffers setbacks and goes into bankruptcy. When dealing with business formation and entity choice, this protection from liability is a principle reason for choosing the corporate form.

In most cases, a creditor has no ability to “pierce” the corporate veil and get to the assets of an owner or shareholder. The typical circumstance where veil piercing may occur is when a corporate owner abuses the corporate form and uses the assets or bank accounts of the corporation for his or her personal purposes. In this case, creditors may be permitted by a court to disregard the corporate form and attach the personal assets.

Some of the discussion involving the U.S. Supreme Court’s Hobby Lobby case speculates that the Court may have caused a tear in the corporate veil, by permitting a closely held corporation to take on the religious beliefs of the owner.

The concern is that by allow this transference of religious belief from the owner to the entity, it is only a matter of time before a case in a bankruptcy or district court, makes the argument that a shareholder is responsible for the debts of the corporation.

While commentators on the topic disagree as to its potential implications, the unintended consequences on “narrow decisions” that mutate and broaden as they are subjected the arguments of hundreds of individual parties over time suggests the impact Hobby Lobby could have on corporate law may be substantial.

Source: NPR.com, “Hobby Lobby Ruling May Have Poked A Hole in The ‘Corporate Veil’,” Wade Goodwyn, August 05, 2014