News & Training
Piercing the Corporate Veil – What It Is and How Corporate Lawyers Can Help
Incorporating a business is frequently the most attractive option when choosing a legal structure for business activity. An incorporated entity functions as a separate legal entity from its owners and shareholders. This means that the legal privileges and liabilities according to a corporation are separate from the legal rights and obligations of its employees and owners.
Limited Liability Protection
California Corporate Lawyers – Limited Liability Protection for Owners and Shareholders
Corporations give their owners and shareholders limited liability protection. The concept of limited liability is to shield the personal assets of the business owner from the financial debts or other obligations incurred by the company. Corporate shareholders are not ordinarily personally liable for the debts or actions of the business; hence, creditors cannot go after an owner’s house or personal bank account to settle the financial obligations and liabilities of the corporation.
Follow The Law – Maintain Corporate Formalities
So long as an incorporated business operates within the bounds of the law and maintains corporate formalities, it will be regarded as a legal entity entirely separate from its owners and shareholders. However, such protection can be lifted through a legal action known as piercing the corporate veil if directors, officers, and shareholders fail to properly carry out their corporate responsibilities.
Applying the alter-ego doctrine allows the court to disregard the corporate status and potentially affirm the personal liability of the directors, officers, and shareholders when they have acted fraudulently or engaged in unfair business practices.
Piercing The Corporate Veil
Piercing the Corporate Veil
The phrase piercing the corporate veil or lifting the corporate veil is a legal decision to disregard the protective nature of the corporation and instead impose the sanction of holding owners and shareholders personally liable for the debts and obligations of the corporation. Under normal circumstances, shareholders cannot be held responsible in a lawsuit when the corporation is sued because of the separate legal entity status of the corporation. But due to negligence and\or wrongful business practices, the separate entity status may be ignored and personal responsibility on corporate shareholders may be enforced by the court.
Lifting the corporate veil is most likely to occur with small business entities rather than big corporations or publicly traded corporations. This is because large corporations have corporate lawyers that handle the legal aspects of their operation, whereas little companies do not have skilled attorneys on staff who pay attention to the legal side of the business. They also do not understand the importance of business lawyers until it is already too late.
Common Factors Considered By A Court When Piercing The Corporate Veil
Piercing the Corporate Veil – Factors Considered – Corporate Records California
Some of the most common factors that can frequently lead to piercing the corporate veil include the following:
- failure to separate corporate funds and commingling said funds with personal assets or diverting corporate funds and assets for personal use;
- the lack of capital to support business operations or undercapitalization;
- failure to follow corporate formalities such as keeping meeting minutes, maintaining proper corporate records, and securing authority to issue or subscribe to stock certificates; and, of course,
- failure to seek assistance from business lawyers.
Frequently Asked Questions
Q: What is piercing the corporate veil?
A: Piercing the corporate veil occurs when a court disregards the corporate structure of a corporation or LLC, and holds the owners personally liable for the corporation’s actions and debts.
Q: How can corporate lawyers help with the concept of piercing the corporate veil?
A: Corporate lawyers can help businesses protect their limited liability status and prevent piercing the corporate veil by helping them properly structure and maintain their corporate structure and business assets.
Q: When can a court justify piercing the corporate veil?
A: A court may justify piercing the corporate veil if there is evidence of fraudulent or illegal activities, or if the corporation is being used as an alter ego for personal benefit.
Q: What are subsidiaries and subsidiary companies?
A: Subsidiaries and subsidiary companies are separate legal entities that are owned by a parent company.
Q: What is corporate liability?
A: Corporate liability refers to the responsibility a corporation has for its actions and debts.
Q: How can I protect my business from corporate liability?
A: By properly structuring your corporation or LLC and conducting annual meetings and following corporate bylaws, you can help prevent the corporate veil from being pierced and protect your business assets.
Q: What happens if the corporate veil is pierced?
A: If the corporate veil is pierced, the owners’ personal assets may be held liable for the corporation’s actions and debts.
Q: Can a court pierce the corporate veil even if the business is a corporation or LLC?
A: Yes, courts can pierce the corporate veil and impose personal liability even if a business is organized as a corporation or LLC.
Q: What is the “corporate veil”?
A: The “corporate veil” refers to the legal separation between a corporation or LLC and its owners’ personal assets.
Q: What are some means and how to avoid piercing the corporate veil?
A: To avoid piercing the corporate veil, businesses should follow corporate formalities, maintain separate records and accounts, avoid fraudulent or illegal activities, and seek the advice of a business law attorney.
Client Conversation
Question: Protecting the corporate veil, I get it. But I could use some more specific guidance…oddly I end up feeling very dumb on this subject. How will it work in everyday life without violating protective legal boundaries? Separate bank accounts, contracts, accounts, billing etc…sounds OK, no problem. Yet when I get down to practical details, some of it seems impossible or unreasonably complicated. Please help me disentangle what’s crucial / necessary and how a smart legal incorporation can function realistically.
Question: Working from home, do I have to purchase a new Comcast subscription and keep separate wires & WiFI for each incorporated business (if that’s even technologically possible)?
Question: Phones. Surely people with 5-10 businesses don’t carry 5-10 phones? I now use an App (iPlumb) for a separate phone # to be operable on my personal phone. The corporation could pay for that App, but it’s still on a personal phone. When I form two Corporations, preferably Corp #2 could pay for an additional line on the existing Corp #1 subscription… then I’d achieve a separate billing and separate #……yet there’d still some be a shared root contract in the basic account. I have asked iPlumb but don’t yet know if it’s even possible to have two manifestations of the App running simultaneously, for 100% separateness.
Question: Email and Cloud backup seem doable separately, but VPN likely not. That runs on the ISP, WiFi, and each device as a whole. In real life I’ll be switching often between tasks and between businesses on one device, one network, won’t I?
Question: Laptops & other devices. I can have a computer for each business, yet at times surely data and activity from one could occur or exist on the other, even personal communications etc. And everything at one time or another on my phone. Just as someone writes or calls their wife from work, or even stores documents at times…is this a violation or a tolerable reality in modern life? I do envision keeping separate subdirectories to store data separately between businesses.
Question: Timing. I already have business activities, operating as a Schedule C business. May I declare to the corporation equipment or subscriptions previously used outside of it? I hope I don’t have to abandon my long-used phone number, clinical patient data & video meeting software subscription, etc. Rather than abandoning prior stuff, may I simply update / alter the subscription so that it’s contracted with the PC and paid through the Corp bank account? Some of my insurance credentialing will take months to re-process, and it’s difficult to imagine running double-subscriptions and redundant equipment, etc. I suppose if I have to do that to ‘maintain the corporate veil’ I’ll do it.
Remember, the main principle is to treat each corporation as a separate entity with its own assets, liabilities, contracts, and records. Mixing of assets or liabilities can lead to a piercing of the corporate veil. It’s also important to ensure each corporation is adequately capitalized and not just a shell company.
Question: Does a Corporation protect personal assets from liability in California? Years ago I heard a local attorney say there’s no protection in CA for a professional liability claims, except for Liability Insurance. I realize this would diminish the value of incorporating in the first place (though there are other business liability gains unrelated to malpractice, and of course there are some tax and other financial benefits). If there is no reliable protection of personal assets, I gather I’d be wise to keep very high liability limits to keep the insurance company incentivized to provide a strong and durable defense from which I’d also benefit.
In general, a corporation or LLC is considered a separate legal entity from its owners, which means that the owners’ personal assets are typically protected from business debts and liabilities. However, there are exceptions to this rule. For example, if the owners personally guarantee a business debt, they can be held personally liable for that debt. Similarly, if the owners engage in fraudulent or illegal activities, they can be held personally liable for any resulting damages.
Regarding professional liability claims, it’s true that a corporation or LLC may not provide complete protection. In some cases, professionals can still be held personally liable for malpractice or other professional misconduct, regardless of whether they operate through a corporation or LLC. This is why professionals often carry malpractice or professional liability insurance. You may also want to speak your insurance broker about getting a separate policy of general liability insurance to cover those potential claims that are outside the coverage of a malpractice insurance policy.
It’s also important to note that the protection offered by a corporation or LLC depends on maintaining clear separation between the business and the owners which we addressed above. This includes keeping separate financial records, not commingling personal and business funds, and following all required corporate formalities.
Piercing The Corporate Veil Can Have Severe Effects
Although rare in occurrence, the outcome of a corporate veil piercing can be severe and drastic, as evidenced in the case of Stinky Love, Inc. vs. Lacy. In addition to improperly diverting corporate funds to pay off personal debts and loans, the corporate owner also shared office space and employees with other business entities he owned and transferred funds freely between his personal bank account and that of the corporation. As a consequence of these wrongful business practices, the court adjudged the owner liable for a $4.3 million obligation of the company.
Corporate Lawyers – Gale and Vallance Business Lawyers
To prevent piercing the corporate veil, small business owners must seek the legal assistance of corporate lawyers. Gale and Vallance Corporate Lawyers is one of the most trusted in corporate attorney services for your business (www.incorporationattorney.com/).
Andrew Gale – Incorporation Attorney
Attorney at Law Offices 1820 West Orangewood Avenue, Suite 104a, Orange, CA 92868 Office: +1 (714) 634-4838. I provide legal advice, counseling and related services to entrepreneurs including the formation and management of their corporations and estate plans.
My Law Office is based in Orange County California and I have practiced law for 30 years. I have given advice to more than 1000 small business owners on the best ways to set up a company, what types of business entities (corporations, limited liability companies, partnerships) are best suited for them and their small business, how to legally run the business to protect their assets and how to successfully transfer the business to family or key employees through the proper use of estate planning and trusts.
