Ethics

According to the law of corporations, shareholders liability is limited to the extent of the amount of stock they have subscribed for (Neyers, 2000, p. 215). The same law treats a corporation as another independent person, and that individuals that are its shareholders will not be liable for it debts, acts or obligations even if they are unlawful. However under certain circumstances the court may unveil the corporation veil for different reasons in order to get the people behind it and hold them liable (Neyers, 2000, p. 215).

When corporations have abused the privilege of conducting business in the corporate outline the courts will hold the owners, employees or director personally liable. The courts will disregard the corporate form, and pierce the corporate veil whenever necessary to prevent fraud if the formation formalities are ignored such as adequate capitalization and proper maintenance of books or records, distinct separation of transactions and accounts of subsidiaries or affiliates, using corporation funds to settle their expenditures and observation of proper statutory provisions (Neyers, 2000, p. 215).

When corporate formation formalities are ignored in a subsidiary corporation entity hence the formalities of separate corporate procedures for each corporation are not observed. Other notable instances have been suggested by OConnor, (1998) as

If a corporation is believed to be an agent or instrumentality of a sole proprietor or of another corporation and conveyed its assets shareholders in fraud of creditors.

If the shareholders treat the assets of the corporation as their own, fail to keep separate corporate books, use corporate funds to pay their private debts, and fail to observe corporate formalities, (p. 371).