When going into business—whether cannabis or otherwise— the first step is to create a business entity. (This seems obvious but still eludes many in the cannabis industry.) One of the principal purposes of establishing a business entity to limit the personal liability exposure of the founders. Typically, the business entity itself and not the investors, owners, or managers of the entity, is liable for the debts of the business in nearly all circumstances. One exception is the alter ego theory of liability.
The alter ego theory of liability attempts to reach pockets beyond the putatively liable business entity. Doing so is known at piercing the corporate veil. The alter ego theory of liability is not limited just to piercing a company to reach into the pockets of the owners. It may also be used to reach into other entities. And veil piercing may be accomplished in few different ways.
Vertical piercing refers to piercing the veil between a subsidiary and its parent to hold the parent company liable. Horizontal piercing refers to using the alter ego theory of liability to hold sister company’s liable. Reverse piercing refers to using the alter ego theory of liability to hold a company
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