What is “Piercing the Corporate Veil?”

If you a shareholder of a San Diego or California corporation, generally speaking, the corporate entity will shield you from personal liability for the business debts and obligations of the corporation. However, under some circumstances, the courts will not allow the corporation to be a shield. This is the legal doctrine called “piercing the corporate veil” or the “alter ego doctrine.” A good San Diego corporate lawyer can help avoid pitfalls than can lead to application of these doctrines. Here is a quick primer.

San Diego Corporate Law: What is Piercing the Corporate Veil?

The doctrine of “piercing the corporate veil” applies in the courtroom. If litigation is filed, one party to the litigation may claim that an opposing party is using the corporate form unjustly. In certain circumstances, the court will disregard the corporate entity, that is, pierce the corporate veil, and will hold the individual shareholders liable for the actions of the corporation. The purposes of the doctrine are these:

• Ensures corporations are used for legitimate business purposes
• Avoids fraud, unfairness, and inequities
• Punishes those that fail to maintain corporate formalities

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

In general, courts will only consider piercing the corporate veil when two conditions are met:

• There is a “unity of interest and ownership” between the shareholders and the company that the legal fiction of the separate existence of the corporation cannot be maintained — this is the idea of the “alter ego” AND
• That allowing for separation between corporation and the shareholders will cause inequitable results, fraud, or other unjust result

The second element is essential. As one California court phrased it:

“Under the alter ego doctrine, then, when the corporate form is used to perpetrate a fraud, circumvent a statute, or accomplish some other wrongful or inequitable purpose, the courts will ignore the corporate entity and deem the corporation’s acts to be those of the persons or organizations actually controlling the corporation, in most instances the equitable owners. ” Sonora Diamond Corp. v. Superior Court, 99 Cal. Rptr. 2d 824 (Cal. App. 5th Cir. 2000).

Note that if and when a court pierces the corporate veil and disregards the corporate entity, the corporation is not dissolved and does not cease to exist. Rather, by operation of the law, the shareholders will be held liable for the corporate debts or other obligations. This is important because a piercing-the-veil claim may be directed at some shareholders, but not all. The non-target shareholders remain protected by the corporate shield.

San Diego Corporate Law: Facts Considered by California Courts?

When a court is determining whether to disregard the corporate entity in a given case, the courts will consider certain facts and circumstances. Among those are:

• Commingling of funds and other assets of the corporation and the shareholder(s)
• That one holds oneself out that he/she/it is liable for the debts of the other
• Identical equitable ownership in the two entities
• Identical directors and officers
• Use of the same offices and employees
• Inadequate capitalization
• Disregard of corporate formalities — no meetings or minutes
• Lack of segregation of corporate records
• And other unique facts

No one fact or circumstance is paramount or prevailing; courts look at all the circumstances to determine whether to pierce the corporate veil.

Contact San Diego Corporate Law Today

For further information, contact Michael Leonard, Esq. of San Diego Corporate Law. Mr. Leonard provides legal services related to business law, private securities offerings/sales, the sale/purchase of a business and with respect to mergers and acquisitions. Contact Mr. Leonard via email or by calling (858) 483-9200.

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