Top 5 Things to Consider About Piercing the Corporate Veil in Los Angeles
Piercing the Corporate Veil: A Court's Investigative Tool3 min read
Piercing the corporate veil is a legal concept which describes when a court of law sets aside the liability protection a corporation provides to its shareholders or owners. In the State of California, particularly Los Angeles, there are certain legal considerations that must be taken into account before a court will consider piercing the corporate veil. For business owners and executives in Los Angeles who require legal counsel, it is important to be aware of these considerations before pursuing legal action.
As one of the most populous cities in the United States, Los Angeles is home to numerous industries, including professional services, finance, entertainment, and more. Businesses of all sizes and types require legal counsel and often the advice of experienced attorneys to resolve disputes and protect the interests of their organizations. When it comes to piercing the corporate veil, five key considerations must be kept in mind:
1. Understanding Corporate Formalities & Penalties for Breach
When creating a corporation or LLC, certain formalities must be observed, such as properly filing the articles of incorporation, keeping accurate records, and regularly observing corporate formalities such as having board meetings or creating corporate bylaws. If the formalities are not respected and followed, the corporate veil may be pierced, and the shareholders can be liable for corporate obligations.
2. Establishing Fraudulent Intent
In order to pierce the corporate veil, a court in Los Angeles must first determine that an act of fraud or deliberate illegal activity is present. This may include concealing the operations of the corporation, failing to keep proper financial records, or creating an unreasonable relationship between the shareholder and the corporation. Simply breaking corporate formalities is not enough to pierce the corporate veil, and fraudulent intent must be established by evidence presented to the court.
3. Shareholder Misuse of Corporate Funds and Assets and Its Perceived Benefits
When a court in Los Angeles examines a shareholder’s misuse of corporate funds or assets, it also considers the benefit that individual received from the misappropriation. This is key, as the shareholder must be found to have personally benefited from the misuse in some fashion. If a shareholder or owner can be proven to have made personal use of corporate funds for their own pleasure or gain, they will be liable for the consequences of their actions and the corporate veil will be pierced.
4. Identifying Third-Party Damages Related to Piercing the Corporate Veil
When a shareholder or owner is proven to have misused corporate funds or assets or failed to observe corporate formalities, the third parties affected by their actions must also be taken into consideration. If shareholders are seen to have caused economic harm to third parties, such as creditors or lenders, a court may decide to pierce the corporate veil and hold them liable for the losses.
5. Procedural Elements Related to Piercing the Corporate Veil
When it comes to legal proceedings involving the piercing of the corporate veil in Los Angeles, certain procedural elements must be observed in order for the process to proceed. This includes filing and serving timely notices, properly conducting depositions, and using any other means of discovery that may be relevant in the matter. The burden of proof and the collection and submission of evidence can also complicate matters and such steps must be taken to ensure the proceedings are effective.
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