Alter Ego Liability in California

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AdobeStock_271469937-300x200In general, shareholders are protected from liability for the debts of the corporation. This is because the corporation is viewed as a separate legal entity with its own assets and liabilities. This “corporate veil” of protection can, however, be pierced in certain situations, and personal liability imposed on the shareholders. Creditors use this legal tactic strategically to be sure they can access funds for what they are owed. The experienced California business attorneys at the Structure Law Group can help advise creditors on how to effectively pierce the corporate veil in order to satisfy the debts they are owed.

Elements of Alter Ego Liability

In order to pierce the corporate veil, the plaintiff must prove “alter ego liability.” Alter ego literally translates to “other self.” In alter ego liability, the corporation has been treated as an extension of shareholders’ personal interests, so the courts find it fair to hold shareholders liable for the corporation’s debts, as well. Plaintiffs in California must establish: (1) that there is a unity of ownership and interest between the owners (or shareholders) and the corporation, and (2) that it would be unfair to only hold the corporation accountable for its debts in order to establish alter ego liability.

Here are some common signs of unity of ownership and interests:

  • Establishing identical corporations with the same owner(s)
  • Using the same staff or office location for both corporations
  • Failing to segregate personal assets from corporate assets (“co-mingling”)
  • Owners using corporate assets to pay personal debts
  • Failing to properly account for corporate assets
  • Under capitalizing the corporation (or failing to capitalize it at all)
  • Not meeting proper corporate requirements such as shareholder meetings, issuing minutes of meetings, or not properly issuing stock in the corporation

How it is Used Strategically

Alter ego liability is not helpful in every case. It is intended for cases in which a shareholder’s personal assets should be fairly used to satisfy corporate debts. This could be because of lazy accounting practices or because of intentional fraud. An experienced corporate lawyer will be able to advise you when this strategy is appropriate and whether you can prove alter ego liability to a court.

If the shareholder does not have assets to satisfy the debt you are owed, alter ego liability is usually not very helpful. This is a tool used for a specific purpose: to access shareholder assets that are, in fact, corporate assets in order to satisfy a corporate debt. This also means that if the corporation has the assets to satisfy your debt, alter ego liability is a moot point.

California Business Lawyers For All Liability Issues

An experienced California business lawyer can help you explore all options for satisfying debts owed by a corporation. The sooner you have an attorney’s advice, the less time your debtor will have to hide assets or develop other plans for avoiding payment. Contact Structure Law Group at (408) 441-7500 or visit our website to schedule a consultation. We help creditors at every stage of financial transactions in order to protect their legal and financial interests.