Business law
The Entity Liability Rule
The entity form sets the shield: owners risk their investment, unless the form is a general partnership or the veil is pierced.
How the exam words it
- -The stem compares entity forms and asks which limits owner liability or how the entity is taxed.
- -A creditor tries to reach the owners personally, raising piercing the corporate veil.
- -A shareholder sues on the corporation's behalf, a derivative suit.
- -A securities offering is described and it asks whether it is exempt or must be registered.
The playbook
- 1Match liability to form: general partners are personally liable, while corporate shareholders, LLC members, and limited partners risk only their investment.
- 2Pierce the veil only for commingling of funds, undercapitalization, or fraud, which reaches the owners personally.
- 3A derivative suit belongs to the corporation, so any recovery goes to the corporation and the shareholder must usually make a demand on the board first.
- 4Screen a securities offering for an exemption (a private placement or Regulation D) before requiring full registration under the 1933 Act.
The trap
Assuming incorporation always shields the owners. Commingling funds, undercapitalizing the entity, or using it to commit fraud pierces the veil and reaches the owners.
How the exam varies it
The same pattern, re-skinned along these axes:
Which entity form and its liability shieldPiercing the veil versus a derivative suitA registered offering versus an exemption
Drill this pattern
8 questions of The Entity Liability Rule from across the AUD topics. Clear it by getting 5 right with a streak of 3.