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Differences Between California Corporations and LLCs: Alter Ego Doctrine

California law has a number of alternative corporate forms for businesses to use with respect to running their businesses. Each form — such as a corporation vs. a limited liability company — has advantages and disadvantages compared to the alternatives. As we have said many times on this blog, the “best” corporate form depends on what type of business you are running and what your business needs are. Moreover, the needs of your business may change over time as your business succeeds and grows. Thus, there are some natural growth points at which a change in corporate form may be explored. In this article we explore the differences between corporations and LLCs with respect to the legal doctrine of piercing the corporate veil.

San Diego Corporate Law: Doctrine of Piercing the Corporate Veil

In general, creating a corporate entity of any type will bring into existence a new legal entity that is legally separate and distinct from its owners. As such, the new entity has legal capacity to make contracts, borrow money, conduct business, etc. In general, the corporate form shields the personal assets of the owners from being attacked or seized by creditors to pay for corporate obligations and/or debts.

However, if the owners of a corporation are not careful with corporate formalities, then California courts can “pierce the corporate veil” and allow creditors to access personal assets. This is true for limited liability companies too. Indeed, piercing the corporate veil for LLCs is specifically provided for in the California Corporation Code, § 17703.04(b) which provides:

“A member of a limited liability company shall be subject to liability under the common law governing alter ego liability, and shall also be personally liable under a judgment of a court or for any debt, obligation, or liability of the limited liability company, whether that liability or obligation arises in contract, tort, or otherwise, under the same or similar circumstances and to the same extent as a shareholder of a corporation may be personally liable for any debt, obligation, or liability of the corporation …”

San Diego Corporate Law: When Courts Will Pierce the Corporate Veil

California courts will pierce the corporate veil when there is a “unity of interest” between the individual and the corporate entity. Facts that courts will consider in evaluating the existence of this “unity of interest” are:

Percentage ownership of all stock in the corporation
Use of the same office or business location
Commingling of personal and corporate funds and other assets
Individual holding himself or herself out as being personally liable for debts of the corporation
Identity of directors and officers
Failure to maintain minutes or adequate corporate records
Failure to hold corporate meetings such as shareholders and directors’ meetings
Inadequate capitalization

Courts are clear that this list is not exhaustive and that no single fact or factor is determinative. See Zoran Corp. v. Chen, 185 Cal. App. 4th 799 (Cal. App. 6th Dist. 2010) (listing fourteen factors).

With respect to LLCs, California statute specifically removes item 7, above, as a factor to be considered with respect to piercing the corporate veil as long as the articles of organization or operating agreement do not expressly require the holding of meetings of members or managers.

The ability to avoid having to hold corporate meetings is one important advantage of LLCs over corporations. Attendant to not having to hold meetings is the avoidance of meeting minutes and other potentially onerous forms of record keeping.

Note, however, the importance of making sure the operating agreement or the articles of organization dispense with the meeting requirements. You need to consult an experienced San Diego corporate attorney to ensure proper compliance with the statutes.

Contact San Diego Corporate Law

For further information, please contact Michael Leonard, Esq. of San Diego Corporate Law. Mr. Leonard can assist with making the proper choice of corporate form and with any other business-related legal matter. Contact Mr. Leonard by email or by calling (858) 483-9200.