“Piercing the corporate veil” is a legal colloquialism used to describe the removal of corporate entity protection to hold shareholders or directors personally liable for corporate debts and liabilities. Limited corporate liability in California, whether through a limited liability company, limited liability partnership, or corporation, is the foundation of the corporate form. Closed corporations are the most susceptible to veil piercing, but corporate protections are difficult to remove absent illegality or serious corporate misconduct.
The Presumption of Limited Liability
Anytime damages are sought directly from a corporate subsidiary, parent company, shareholder, or director, California presumes corporate protection. The plaintiff must overcome this presumption based on the facts of each case. This can be done in two ways:
(1) at common law, where wrongful conduct is typically required, or
(2) under the “alter ego” doctrine of liability.
The alter ego doctrine is typically utilized to impose corporate-to-corporate liability, i.e., hold a parent company liable for the debts of its subsidiary, while a common law analysis is often required to hold individual directors liable for corporate misconduct.
California Alter Ego Liability
Shell companies, holding companies, and subsidiary corporations are commonly used to limit the liability of a parent company. Such constructions are not illegal per se, but they can be misused. The primary avenue of piercing the corporate veil in California is the alter ego doctrine, which allows veil piercing when the liable business entity is merely an “alter ego” of the party you seek to hold liable. California courts may pierce the corporate veil under this doctrine if:
- The entities have a unity of interest, i.e., they share funds, are run by the same directors, and have the same shareholders, and
- It would be unjust to treat the corporate acts as separate from the acts of the shareholder or the alternative corporation.
Wrongful conduct is not required to pierce the corporate veil under the alter ego theory of liability in California. Instead, the primary consideration is whether it would be unreasonable or unjust to refuse to pierce the veil. This requires a case-by-case factual analysis.
Factors to Consider for Veil Piercing in California
California courts may pierce the corporate veil when one or more of the following factors are present and the same are indicative of injustice:
- The individual defendant controls the corporation;
- The individual defendant owns all or almost all of the corporate stock;
- There is a co-mingling of private and corporate assets such as shared bank accounts, funds, and records;
- The business shares residential or corporate address;
- Corporate funds are used to pay the personal debts and expenses of the individual defendant or alternative corporation;
- The corporation fails to adhere to certain corporate formalities such as the election of directors;
- There are insufficient corporate records;
- The business has insufficient assets and capital;
- The individual defendant is the primary “employee” or contractor of the entity; and
- It appears the corporation is a shell corporation.
Taken together, these factors are indicative of misuse of the corporate form for private gain.
Hire an Experienced Silicon Valley Corporate Lawyer Today
If you believe a shell corporation owes you a debt, schedule your business litigation consultation with our Silicon Valley corporate attorneys at Structure Law Group, LLP today by calling 408-441-7500 or contacting us online.