Getting Started on Piercing the Corporate Veil: Understanding Los Angeles Laws
Piercing the corporate veil is a technical term used to describe a legal move4 min read
Piercing the corporate veil is a technical term used to describe a legal move. It is a move that allows a court to disregard the protection of limited liability that is otherwise granted to a corporation. Effectively, it allows a court to go after a corporation’s shareholders, directors, and officers for the debts and wrongdoings of their company. If you are a business executive looking for legal guidance on piercing the corporate veil in Los Angeles, you should first start with comprehensive research to understand the specific laws of the region.
Laws of piercing the corporate veil are diverse and each state has its own individual set of regulations. It is important to understand the laws in place in California, and more particularly, in the city of Los Angeles. Before researching the subject matter further, familiarize yourself with the jargon associated with piercing the corporate veil, and other related legal terminologies. A term that is used frequently and is important to understand is corporate entity or corporate shielding. This term is frequently used to denote the protection granted to shareholders, and other company stakeholders, from being held liable for the company’s debts and wrongdoings.
When a business is structured as a corporation, directors, shareholders, and officers do not have to bear the burden of their company’s liabilities or debts for actions performed under them. They are legally protected from these outcomes without having to worry about their personal assets being in the line of legal targets. This is the crucial role played by the corporate veil and it is based on the legal concept of separate personality. However, this separate personality can be removed or pierced if needed.
Although piercing the corporate veil is not easily attainable, most states have created a “scandalous breach of faith” policy that can be used to pursue individuals affiliated with the company (shareholders, directors, officers, etc). This policy can help make the process of piercing the corporate veil easier, with little to no requirement for convincing the judge. In the state of California, and primarily in Los Angeles, this policy is also known as the Alter Ego Doctrine.
The Alter Ego Doctrine can help the court establish that two entities, usually corporations, are related and intermingled in order to be able to go after the parent company’s shareholders. For example, a parent company’s officers or directors who are using the quotes of its subsidiary to avoid debts or liabilities. To do this, the court must evaluate a few different factors.
The first area of focus for the court is the undercapitalization of the company itself. If the company has inadequate resources, the court may consider this to be an indication of improper conduct or misuse of the company’s funds by the individuals associated with its ownership. The court may also investigate the company’s commingling of funds, transfer of assets, and utilization of a single institution for multiple corporations to pay bills or sign contracts. Depending on the observation of these factors, the court may decide on piercing the corporate veil if it finds that the actions of the company are not consistent with the policies of corporate protection.
Another area where the court looks for evidence is to determine if the actions of those being charged are in an individual capacity, rather than a corporate one. Meaning, that the charges are being levied on an individual, rather than the company. And, the actions being charged for are also performed in individual roles, rather than company roles. This helps the court understand if intermingling has taken place and whether or not a company’s actions have been used to benefit individual interests thus going against the policy of corporate protection.
In the case of Los Angeles, it is vital to understand the local court procedures. The court may ask for proof of Nexus, which would necessitate the need to provide a valid reason as to why the defendants need to be pursued specifically through piercing of a corporate veil. Additionally, the court may also require proof of a “unity of interest” between the defendants and the company performance which the court feels goes against the policy of corporate protection.
In the case of a dispute over assets, evidence of a fraudulent transfer will also need to be presented in support of piercing the corporate veil. This may require proof that the transfer of assets was done in a deliberate effort to shield these assets from further dealings and to limit their use in court proceedings.
After understanding the basics of piercing the corporate veil, and the relevant laws enforced in Los Angeles, you should look for legal counsel that understands the local regulations and court procedures. UpCounsel provides access to experienced lawyers that can help build a stronger legal defense for you and your business. With UpCounsel’s network of attorneys, you can have access to high quality legal advice for an affordable cost.
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