ExpertHard1 markMultiple Choice
CPA · Question 10 · Area II: Business Law
Which of the following scenarios would most likely result in a 'piercing of the corporate veil,' holding shareholders personally liable for corporate debts?
Which of the following scenarios would most likely result in a 'piercing of the corporate veil,' holding shareholders personally liable for corporate debts?
Answer options:
A.
The corporation has been insolvent for three consecutive years.
B.
The corporation is a wholly-owned subsidiary of another corporation.
C.
The shareholders commingled personal and corporate funds and failed to hold required corporate meetings.
D.
The corporation elected S corporation status to avoid double taxation.
How to approach this question
Look for 'Alter Ego' factors: Commingling funds, undercapitalization at inception, or failure to follow corporate formalities.
Full Answer
C.The shareholders commingled personal and corporate funds and failed to hold required corporate meetings.✓ Correct
Courts will pierce the corporate veil if the corporation is used as an 'alter ego' of the shareholders. Commingling personal and corporate funds and failing to observe corporate formalities (like holding meetings) are classic evidence of this.
Common mistakes
Thinking insolvency or single ownership is enough.
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