What is the primary reason for "piercing the corporate veil"?

Piercing the corporate veil is a legal concept used to hold shareholders personally liable for the debts and obligations of a corporation, typically in situations where the corporate structure has been misused. The primary reason for this legal action is to avoid fraud or unfairness. When shareholders abuse the corporate form—by using it to perpetrate fraud, mislead creditors, or engage in other unjust conduct—the courts may disregard the corporation's separate legal entity status. This allows creditors to pursue claims against the personal assets of the shareholders, preventing individuals from benefitting from the corporate shield when they engage in wrongful actions.

Establishing corporate formalities is important for maintaining the liability protection that a corporation offers, but it does not address the issue of misconduct. Increasing shareholder liability or protecting directors from personal liability does not align with the purpose of piercing the corporate veil, which fundamentally seeks to prevent unjust outcomes arising from the misuse of the corporate entity for fraudulent purposes. Thus, the focus is on remedying situations where the corporate structure is exploited, leading to a need for accountability to ensure fairness.