Jacobs and Dodds is a business/labor law firm with offices in Orange County and Los Angeles County. Each partner has over 35 years of experience. The firm handles employment issues on behalf of employers, business litigation and business transactional matters for over 300 companies.
In Orange County call us at (949) 645-7300. In Los Angeles County call us at (424) 247-1195.
Alter Ego Law In California
When you incorporate in California, your new
corporation and its shareholders are suppose to be distinct and separate
entities. A key principle of corporate law is that a shareholder of a
corporation is not personally liable for obligations of the corporation beyond
the extent of the shareholder's investment in the corporation. Limited liability
serves an important public policy, encouraging investment by limiting risk.
However, limited liability for shareholders is not absolute or automatic and can
be defeated in instances when the corporation is deemed to be the alter ego of
the shareholders, and the veil of the corporation is pierced.
Piercing the Veil of California
Courts apply what is referred to as the
"alter ego" doctrine to determine whether the veil of a particular corporation
should be pierced (i.e., whether the corporate identity should be disregarded
and liability should be placed on the shareholders). The alter ego doctrine
provides that the corporate veil may be pierced when:
1. There is such a unity of interest
between the shareholders and the corporation that the separate personalities of
the corporation and the shareholders do not in reality exist;
2. Recognition of the shareholders and
the corporation as separate entities would be inequitable.
There is no one test to determine when
the corporate veil will be pierced. In California, the courts look at a number
of factors, including the following:
a. Commingling of funds and other
b. Failure to segregate funds of the
separate entities, and the unauthorized diversion of corporate funds or assets
to other than corporate uses.
c. The treatment by an individual of the
assets of the corporation as his/her own.
d. The failure to obtain authority to
issue stock or to subscribe to or issue the stock.
e. The holding out by an individual that
he is personally liable for the debts of the corporation.
f. The failure to maintain minutes or
adequate corporate records, and the confusion of the records of the separate
If there are two or more corporations
that are owned or controlled by the same individuals, the following added
factors are important:
a. The identical equitable ownership in
the two entities.
b. The identification of the equitable
owners thereof with the domination and control of the two
c. Identification of the directors and
officers of the two entities in the responsible supervision and
d. Sole ownership of all of the stock in
a corporation by one individual or the members of a family.
e. The use of the same office or
f. The employment of the same employees
g. The failure to adequately capitalize
h. The total absence of corporate assets
i. The use of a corporation as a mere
shell, instrumentality or conduit for a single venture or the business of an
individual or another corporation.
j. The concealment and
misrepresentation of the identity of the responsible ownership, management and
financial interest, or concealment of personal business
k. The disregard of legal formalities
and the failure to maintain arm's length relationships among related
l. The use of the corporate entity to
procure labor, services or merchandise for another person or
m. The diversion of assets from a
corporation by or to a stockholder or other person or entity, to the detriment
of creditors, or the manipulation of assets and liabilities between entities so
as to concentrate the assets in one and the liabilities in
n. The contracting with another with
intent to avoid performance by use of a corporate entity as a shield against
personal liability, or the use of a corporation as a subterfuge of illegal
o. The formation and use of a
corporation to transfer to it the existing liability of another person or
Contact the business law firm of Jacobs & Dodds if you have any questions regarding alter ego. Visit us at:
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