A corporation is a legal entity that grants its shareholders and directors certain legal protections. While these members are generally protected from the debts of a business, it is not always the case. A plaintiff can “pierce the corporate veil” in certain situations, meaning that the court will hold the shareholder or director personally liable for the debts of the business. It also means that your personal assets can be used to satisfy business debts. Learn more about “piercing the corporate veil” – and what a corporate lawyer can do to help minimize your risk of liability.
What Is “Piercing the Corporate Veil?”
In common law, corporations have provided legal protections for their shareholders and directors. Shareholders and directors are not generally held personally liable for the debts of their business. In some limited circumstances, however, it might be possible to “pierce the corporate veil” of legal protection and hold them personally liable for corporate debts. Doing so allows plaintiffs to access the personal assets of shareholders and directors to satisfy the debts of the business.
When Are Shareholders or Directors Personally Liable for the Debts of a Business?
There are two main methods of “piercing the corporate veil” under California law. The first is when there is wrongdoing by a particular shareholder or board member. If, for example, one of the directors committed fraud on behalf of the company, the company might be financially responsible for those acts. Shareholders can then “pierce the corporate veil” to hold that director personally liable for the financial losses they suffered due to the wrongful act of fraud.
The second is known as “alter ego” liability. Each corporation is defined as a separate legal entity under the law. If shareholders treat corporate assets as their own property, or if corporate subsidiaries are treated the same, the law may no longer consider that corporation a separate legal entity. Plaintiffs can then “pierce the corporate veil” to satisfy corporate debts. There are many factors a court considers when determining whether to pierce the veil and impose “alter ego” liability:
- Whether funds have been co-mingled
- Whether debts of one entity are paid with the assets of the other
- Whether the two entities use the same address
- There are no business formalities (such as elections and meetings) or insufficient records
- The business has insufficient assets to meet its liabilities
There is no single factor that determines whether a company will be treated as a separate entity. In general, the more factors that are present, or the more egregious the factors are, the more likely it is that alter ego liability will be imposed.
Silicon Valley Business Lawyers for Comprehensive Liability Protection
With a little strategic planning, your business can be protected from alter ego liability. Adhering to business formalities, maintaining thorough records, clearly separating funds and other good business practices will drastically reduce the risk that anyone will “pierce the corporate veil” of your legal protection. The experienced California corporate lawyers at Structure Law Group can help you design policies and procedures that will protect both you and your business. Call (408) 441-7500 to schedule a consultation or contact us online.