Frequently Asked Questions About Piercing the Corporate Veil
The Corporate Veil: Liabilities and Debts Separate from Shareholders, Employees and Directors3 min read
The corporate veil is a legal concept in which a corporation or LLC (Limited Liability Company) is responsible for its own liabilities and debts, rather than its shareholders, employees and directors. If the corporate veil is successfully pierced, then the company’s shareholders, employees, and/or directors can be held liable for the corporation’s debt or liabilities. If you are a business owner in Los Angeles and are considering setting up a new corporation or LLC, understanding the law of piercing the corporate veil in your jurisdiction is invaluable. This article introduces the concept of penetrating the corporate veil, and then addresses some frequently asked questions about this important legal concept.
What is Piercing the Corporate Veil?
Piercing the corporate veil refers to the legal process of holding the shareholders, directors, and/or officers of a corporation liable for the corporation’s debts and liabilities. Courts may pierce the corporate veil when there is evidence that the corporation was set up to conduct illegal activities, or if it was used to circumvent the law or to commit fraud. Piercing the corporate veil can also occur when the corporation fails to adequately identify itself as a separate legal entity, or when its officers and directors breach their fiduciary duties to the company.
When Is Piercing the Corporate Veil Justified?
Piercing the corporate veil is only justified when there is evidence that the company’s shareholders, directors, and/or officers engaged in fraudulent activities, or when they have not adhered to their fiduciary duties to the corporation. A court may also decide to pierce the corporate veil when there is a clear pattern of the company being used to intentionally dodge legal involvement or evade a debt.
For example, if a company has transferred assets to another entity in order to avoid paying creditors, the court may pierce the corporate veil and hold the company’s shareholders liable for the debt.
What Type of Evidence Is Required to Pierce the Corporate Veil?
Courts will only pierce the corporate veil when there is evidence that the company’s shareholders, executives, and/or directors acted in a fraudulent or illegal manner, or when they breached their fiduciary duties. The court must be presented with evidence indicating that the corporation was established to allow its owners to conduct activities that would otherwise be unlawful. The plaintiff must also prove that, as a result of this behavior, the shareholder or officers of the corporation have been unjustly enriched.
In Los Angeles, what Causes of Action Can be Used for Piercing the Corporate Veil?
For cases in Los Angeles, there are several causes of action that can be used to attempt to pierce the corporate veil. Generally, these are considered “alter-ego” or “instrumentality” claims, which assert that the corporation was created as an alter-ego of its owners and/or directors or as an instrument for the personal gain of its owners and/or directors. In order to succeed in such a claim, the plaintiff must prove that the corporation has completely disregarded corporate formalities, and that it has been used by its owners and/or directors to commit fraud or evade liabilities.
UpCounsel provides access to a network of experienced lawyers who specialize in understanding the laws related to piercing the corporate veil in Los Angeles. If you are a business owner in Los Angeles, contact UpCounsel to find counsel with expertise in corporate, securities, and transactional law so that your company will be protected against potential liability.
Topics:
