Piercing the Corporate Veil in Los Angeles: Knowing When and How It’s Done
When a corporation is formed, it is considered to be a legal entity that exists separately from its owners3 min read
When a corporation is formed, it is considered to be a legal entity that exists separately from its owners. As a result, the owners’ personal liability is limited in most cases. This concept is referred to as the “corporate veil,” but there may be instances where this veil can be pierced, thereby exposing the owners to personal liability. If you're based in Los Angeles and looking for counsel that understand local regulations, you should learn more about how and when the corporate veil can be pierced.
In looking at the basics of corporate veil piercing, first we need to look at the concept of limited liability. Limited liability is a legal concept, designed to limit the owners’ liability for the actions of the corporation. This limitation is afforded due to the fact that the corporation is viewed as an entirely separate legal entity from its owners or shareholders. Generally, when a company takes on debt or contracts some form of obligation, the persons who birthed the business entity are not personally responsible for such debts. The reason is because, when a corporation is formed, the assets of the company itself are used to pay its debts.
Of course, there are instances where the corporate veil can be pierced. A court can pierce the corporate veil when a business owner acts outside of the scope of the corporation, or act to breach some form of legal obligation or duty. For example, if a corporation enters into a contract to purchase goods or services, but the owner of the corporation fails to make the required payments, they can be held responsible for those payments in certain circumstances. In California, this is known as the "alter-ego doctrine," which holds that when a corporation fails to follow the formalities of normal corporate practice, then its liability on certain matters may be attributed to the owners and shareholders of the business.
In general, corporate law provides a great deal of protection to business owners, and the courts do not take the alteration of the corporate veil lightly. However, this is not to say that such veil piercing is impossible, as alter-ego liability can be triggered when certain conditions are met. Generally, these conditions include facts of undercapitalization, the lack of observance of corporate formalities, or the use of the corporation as a shell entity for shield family members from liability. As you can imagine, the legal process can be both complex and time consuming to successfully prove a veil-piercing claim.
Establishing a separate legal entity requires more than just filing incorporation papers with the state. It also requires strict compliance to certain corporate formalities which includes with filing annual corporate minutes, paying state fees and taxes, observing corporate formalities (such as establishing separate corporate bank accounts and books, issuing stock, keeping records of shareholder meetings, and so on). Furthermore, the LLC and corporate member should avoid intermingling personal and business accounts. Failure to observe the formalities of business organization, or neglecting to pay fees, taxes, creditors, and other obligations may result in the debt of the company becoming the responsibility of those involved, instead of the corporation.
When it comes to corporate veil piercing in Los Angeles, it's important to understand both the limitations of the corporate veil and the regulations that govern it. There are many legal considerations and rules that must be taken into account when using a corporation as a business entity, and it is important to seek the advice and guidance of an experienced attorney when attempting to use the corporate veil for business purposes.
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