Piercing The Corporate Veil
Posted: Friday, February 12, 2010
by Anthony Spotora
Law Offices of Spotora & Associates, P.C.
So you own your own company! Whether you're a newcomer to being your own boss or a seasoned veteran, you are calling the shots. Finally! You have big plans and damn it if you're not going to exceed your own expectations!
You are watching your costs and, although you intended to "do it right" from the start, things have fallen behind a bit and honestly, there is a new priority list - it's as simple as that! Mind you, you fully intend to maintain your corporate legal formalities - whatever those are - but right now, you're busy and; not only are you busy but, if business fails to be profitable enough, those legal formalities will become immaterial . . . just as will the business itself. Besides, your corporation provides you with a shelter known as limited liability. So, you're fine. Right?
However, this protection is not absolute and so things can begin to get tricky!
Under certain circumstances, courts will disregard the corporate entity (including LLC's) and 'pierce the corporate veil'. The result - individual shareholders, directors, officers or members can be held liable for corporate actions. Suddenly, personal financial resources and, assets such as your home, can be in jeopardy.
So, under what circumstances may a court pierce your corporate veil or, as it is also known, find that you have utilized the corporation as an 'alter ego'? Good question!
First, you should know that the Alter Ego theory is one of the most commonly alleged equity-based principals around and that the common law doctrine of 'piercing the corporate veil' is recognized in all 50 states.
To successfully prosecute such a claim, the plaintiff must prove that (i) there is a unity of interest between the corporation and the potential debtor, such that they have no practical separate existence, and (ii) an inequitable result will occur if the corporation alone is held responsible.
In California, courts often consider a list of factors to determine whether Alter Ego liability is appropriate. No one factor is controlling or must be present. These factors are generally laid out in Associated Vendors, Inc. v. Oakland Meat Packing Co. (20 Cal.App.2nd 825 and 26 Cal.Rptr. 806 (1962)). When summarizing prior cases, the Associated Vendors' Court identified a number of possible factors, the most notable of which are:
1. Commingling of funds and other assets, failure to segregate funds of the separate entities, and the unauthorized diversion of corporate funds or assets to uses other than corporate uses;
2. Treatment by an individual of the assets of the corporation as his own; Diversion of assets from a corporation by or to a stockholder or other person or entity;
3. Diregard of legal formalities, including the failure to maintain adequate corportae/accounting records and/or minutes;
4. Domination and control of the corporation by its equitable owners;
5. Use of the same office or business location, the employment of the same employees and/or attorney;
6. Failure to adequately capitalize a corporation;
7. Use of a corporation as a mere shell, instrumentality or conduit for another person or entity, use of the corporate entity to procure labor, services or merchandise for another person or entity; and/or
8. Failure to maintain arm's length relationships among related entities.
The factors listed above involve factual allegations which are subject to enormous potential dispute. Because of this, 'corporate veil' cases can come with significant costs!
Therefore, if you own a corporate entity or are considering establishing one, help protect yourself, and your future, by maintaining your corporate legal requirements!
An ounce of prevention could be worth a pound of cure!
--------
Anthony J. Spotora, Esq. has been called "The Cure for The Common Lawyer". He has an extensive background in Business/Corporate & Entertainment/IP matters and is the Managing Attorney of his full service Los Angeles law firm. http://www.spotoralaw.com
This Article has been viewed 601 times. (Not updated in real-time.)
No comments yet.We want your comments! If you can read this, you don't have javascript enabled, so you can't use this comment system. Please enable javascript.