Piercing the Corporate Veil in California

Corporations are legal entities that shield shareholders, which are the true owners of a corporation, from potential losses, except any monetary investment in the company. For example, if Joe Investor seeks to invest in a company, he buys its stock on the open market. He does not have any connection with the company outside of the stock purchase. If the company is sued for any number of things or has to declare bankruptcy, Mr. Investor loses only his initial investment.

As is common in many small businesses if the shareholder, owner and principal decision maker disregards the various necessities of corporate form, such as by commingling personal and corporate funds, the owner may lose the protections that the corporate form provides and they may lose more than the initial monetary investment in the corporation and be held personally liable on the debts of the corporation. The legal principle of piercing the corporate veil enables shareholder litigation, or others who have a valid debt with the corporation, to pass the liability through to the shareholder who is operating the corporation as their corporate alter ego. The use of a corporate form as an alter ego is but one means of piercing the veil.

It can be rather difficult in fact to actually pierce the corporate veil. The corporate principal must essentially treat the corporation as an alter ego, or a mere instrumentality of the corporate principal, designed to defraud creditors to lose the protections of the corporate form. If the principal actually engages in a legitimate business, without commingling personal and corporate funds, there should be little problem. Personal bills should not be paid for via the corporate accounts. There should be separate bank accounts, utility accounts, credit card accounts, et cetera. Corporate funds should pay corporate bills. The money should flow from one bank account to another, and the personal bill paid for out of the personal account.

In addition, all business should be done under the corporate name. It is not uncommon for creditors to ask for both a corporate as well as personal guarantee; this should not be a violation of the prohibition against commingling, as there is a clear delineation of the two different legal entities.

Maintaining a legal firewall between the two entities, thus defeating an attempt to pierce the corporate veil, can only be strengthened by creating an operating agreement, which notes the shareholders, the percentage of ownership of each, along with maintenance of key corporate documents, recording of regular corporate meetings and similar required formalities. Finally, it is always best to conduct business on letterhead, with the position of the different parties delineated on the signature line.

If you have questions as a shareholder or as a corporate representative, you need an experienced attorney to help guide you. The lawyers of SAC Attorneys have represented shareholders, principals, and corporations for years. We serve clients throughout Silicon Valley. Call today to schedule a comprehensive consultation. Contact us today to schedule your consultation.