• Explanation

One of the main reasons to form a corporation is to limit the personal liability of the owners (Choice B). This is often referred to as a corporate veil that protects shareholders' personal assets from being used to satisfy the corporation's liabilities. However, courts will pierce the corporate veil and hold shareholders personally liable for the corporation's liabilities in the following circumstances:

• Undercapitalization:  This occurs if the capital the shareholders contributed to form the corporation is inadequate to meet the corporation's reasonable financial needs.
• Shareholder fraud:  In this situation, shareholders created the corporation with the intent to commit fraud (eg, a Ponzi scheme).
• Ignoring corporate formalities:  This involves the shareholders' operating the corporation without following legal formalities such as electing a board of directors and holding shareholder and board meetings. In essence, the shareholders acted as if the corporation did not exist.
• Commingling assets:  In this situation, shareholders consistently treated corporate assets as if they were the shareholders' personal assets, using them for personal purposes (eg, paying a home mortgage).

(Choices C and D)  A shareholder's liability is not affected by transactions or relationships with the corporation, such as selling property to the corporation or acting as an officer, director, or employee.

Things to remember:
Courts will hold shareholders personally liable for a corporation's liabilities (ie, pierce the corporate veil) for situations such as undercapitalization, shareholder fraud, ignoring corporate formalities, and commingling assets.