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 Corporations

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; and

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 assets.

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 entities.

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 entities.

c. Identification of the directors and officers of the two entities in the responsible supervision and management.

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 business location.

f. The employment of the same employees and/or attorney.

g. The failure to adequately capitalize a corporation.

h. The total absence of corporate assets and undercapitalization.

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 activities.

k. The disregard of legal formalities and the failure to maintain arm's length relationships among related entities.

l. The use of the corporate entity to procure labor, services or merchandise for another person or entity.

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 another.

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 transactions.

o. The formation and use of a corporation to transfer to it the existing liability of another person or entity.

Contact the business law firm of Jacobs & Dodds if you have any questions regarding alter ego. Visit us at:

www.newportbeachattorneys.org






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