Professor Ballantine defined inadequate capitalization as a ground for piercing the corporate veil : "if the capital be trifling or illusory compared with the business to be done or the risk of loss, this is a ground for denying the separate entity privilege." Earlier in the same passage, Ballantine stated that "[i]t is comign ot be recognized as the policy of the law that sharehodlers should in good faith put at risk of the business unencumbered capital reasonably adequate for its prospective liabilities.
What is capital for these purposes?Edit
There is not set conclusion; for some, capital consists of equity permanently contributed to the corporation, subject to control by the corporations board of directors. To others, capital consists of all owner contributions (equity and loans) available to satisfy the corporation's liabilities. For certain purposes, liability insurance coverage may also be considered to be the capital of the business.
- see cases
- baatz v. arrow bar
- radaszewski v. telecom
When is capital adequate?Edit
There is little instructive authority on what constitutes adquate capitalization aside for Professor Ballentine's quote about capital "trifling or illusory copmared with the business to be done or the risks of loss." Courts either employ a "know it when they see it" conclusionary approach or leave the matter to the jury.
Is inadequate capitalization alone a sufficient ground?Edit
depends on jurisdiction
Does a duty ever arise to "top off" the original capital?Edit
The answer appears to be that once the capital of a corporation has proven to be sufficent for purposes of veil piercing, not such later duty to "top off" arises and no risk of corporate disregard reenter the pciture.