A corporation is an artificial or fictional person, ordinarily distinct from both its individual members or shareholders and its subsidiaries and affiliates, even when owned by just one person. A key reason many organizations separately incorporate corporations is to use them to carry out distinct tasks and to avoid risking the assets of other entities. The corporate form is not to be disregarded except in limited circumstances, such as when the corporation is dominated and controlled in such a way that it is, in essence, merely an alter ego; when there is some sort of improper conduct in either the formation or the use of the corporate form; and when the improper conduct injures the claimant.

State laws differ about what circumstances justify "piercing the corporate veil." Examples of improper purposes include misleading or defrauding creditors, hiding assets, evading statutory requirements or making loans to officers. The less autonomous, separately financed and capitalized are the two entities involved, the more likely it is that they will be deemed the equivalent of a single corporation. Hence, courts have "pierced the corporate veil" and held a parent responsible for its subsidiary's debt when the subsidiary had no bank account, no assets, no capital and no employees, and when the subsidiary had entered into a contract with a creditor knowing that it had no ability to perform the contract.

Likewise, a corporate parent was liable for its subsidiary's breach of a lease when both corporations were controlled by the same person, the subsidiary operated out of the same facilities as the parent, the subsidiary's contracts were performed by the parent's employees, the subsidiary had never been capitalized, the subsidiary's financial obligations were paid by checks drawn on the parent's bank account and all the funds earned by the subsidiary were directly deposited into the parent's bank account. (As an additional example, see GTAS Assets Solutions, LLC v. African Methodist Episcopal Church discussed below.)

Corporate parents can also be liable for the acts of their subsidiaries under an agency theory, such as when the parent exercises control over its subsidiary to such an extent that the subsidiary manifests no separate corporate interests of its own and functions solely to achieve the purposes of the parent corporation.

In the context of certain employment laws, separately incorporated entities may also be deemed "joint employers" when they both exert significant control over the same employees; for example, in connection with authority to hire and fire the relevant employees, authority to promulgate work rules and assignments and to set the employees' conditions of employment, involvement in day-to-day employee supervision, and control of employee records.

As all of this demonstrates, the incorporation of a separate entity is just the first step in realizing the benefits of the corporate form. Counsel can assist you with putting in place additional policies and procedures to protect against disregard of the corporate form.