In small businesses, the distinction between the corporation and the individual becomes blurred, leading to frequent application of the doctrine of piercing the corporate veil. This significantly impacts the transparency of business operations and fair trade practices, necessitating clear standards to ensure legal certainty.
The capacity to be the subject of rights and obligations is called legal capacity. A person acquires legal capacity automatically at birth and retains it throughout their lifetime. Thus, a person becomes the subject of ownership rights over property, enjoys claims against others, and also incurs debts. Organizations formed by groups of people can also acquire legal personality—legal capacity granted by law—if they meet certain requirements. Among these organizations are those formed by people with a specific purpose, existing as distinct, independent entities separate from their members. They maintain operational structures and continue to exist regardless of members joining or leaving.
These are called associations (社團), and the qualities they possess are referred to as associational nature. The members of an association are called members. An association must be registered as a legal entity (法人) to acquire legal personality; an association possessing legal personality is called an incorporated association. Conversely, an association possessing associational nature but not registered as a legal entity is called an ‘unincorporated association’. Only individuals and corporations possess legal capacity, and an individual’s legal capacity is strictly distinguished from corporate status. Consequently, debts incurred by an incorporated association in its own name must be repaid using the association’s assets; liability does not extend to individual members.
A company is also a corporation possessing the characteristics of an association. The representative type of company, the stock corporation, is composed of shareholders, who hold shares in the company proportional to the number of shares they own. However, the Commercial Act revised in 2001 allowed a single person to establish a company as the sole shareholder by contributing the entire capital. This recognized a form of corporation that could be considered lacking the characteristics of an association. This is particularly useful in the early stages of starting small and medium-sized enterprises or venture companies. A company originally with multiple shareholders may, through inheritance, sale, or transfer of shares, end up with all shares owned by a single person. In such a ‘single-shareholder corporation’, the sole shareholder often becomes the company’s representative director. When a single shareholder becomes the representative body of the company in this manner, it becomes ambiguous whether the management entity is the individual or the company. The operation of the corporate entity appears less like independent corporate management and more like the business of an individual entrepreneur.
Problems occasionally arise when the distinction between the personality of the individual members and the corporate personality of the legal entity appears unclear. Under commercial law, a company designates only the board of directors as the decision-making body for business execution. Furthermore, the representative director is one of the directors, an office elected by the board. The appointment of directors and their compensation are decided at the shareholders’ meeting. However, when there is only one shareholder, decisions effectively follow that shareholder’s will, and the functions of the board or shareholders’ meeting can easily become diminished. In severe cases, profits generated by the company accrue to the shareholder who is also the representative director, leaving the company itself as little more than a shell. When a company operates indistinguishably from a sole proprietorship, with the corporate name and structure serving merely as a facade, parties transacting with the company may suffer financial harm.
In such cases, the doctrine of piercing the corporate veil is invoked, arguing that the company’s legal personality should be temporarily disregarded and the company and shareholder treated as one, specifically for that particular transaction. While the law does not explicitly address this, courts accept it by invoking the doctrine of abuse of rights. They view holding the company solely liable when it is completely controlled by a single shareholder, and its accounting, shareholder meetings, or board operations fail to function lawfully, as an abuse of the corporate system.
The application of this doctrine of piercing the corporate veil occurs primarily in small businesses and rarely in large corporations. Particularly in recent years, amid the complexity and rapid changes of the global economy, such cases have increased significantly. Consequently, there is a growing call for clearer legal provisions regarding the criteria and procedures for applying the doctrine to ensure legal stability and fair transactions. Transparent corporate operations and fair transactional relationships are essential for economic development and building social trust.
The necessity of the doctrine of piercing the corporate veil is also becoming more prominent due to the increase in diverse business structures and forms within the modern economy. Particularly, the development of the internet and technology has led to the emergence of new business models and corporate structures, challenging traditional concepts of corporate entities. To respond to these changes, the legal framework must also continuously evolve and adapt.
