Business Lawyers Blog
One of the primary benefits of incorporating your business and complying with corporate governance laws is that a corporation provides personal liability protections for its owners from the debts and liabilities of the corporation. These protections exist because a corporation is viewed as an entity that exists separate from its owners and this creates a “corporate veil” which is intended to protect the shareholders from personal liability. However, there are some circumstances in which an injured party may hold shareholders personally responsible for the debts or actions of the corporation. This is commonly referred to as either “alter ego liability” or “piercing the corporate veil.”
Generally speaking, when a party sues a corporation, that party seeks money from the corporation and not from shareholders as individuals. In some situations, however, owners may simply be using a corporation as an “alter ego” for themselves and they do not actually treat the corporation as a separate legal entity. In such cases, a party suing the corporation may pierce the corporate veil and try to hold the owners personally liable as well. While successful alter ego liability is rare, it does occur and all corporate owners should take steps to avoid it whenever possible.
Signs of “Alter Ego” Corporations
There are two main requirements for alter ego liability. First, the plaintiff must prove that there exists a “unity of interest and ownership” between the owner and the corporation so that separate identities do not actually exist. In addition, the plaintiff must demonstrate it would be unfair to them if the court only held the corporation liable for the acts in question.
In California, courts have set out certain factors that may indicate that alter ego liability is the fair and just outcome, including:
- Corporate and personal funds are co-mingled and not properly segregated;
- Owners use corporate assets as their own (e.g. owners use corporate funds to pay for personal debts);
- Any statements by owners assuming liability for company debts;
- Having two identical corporations, one of which is the owner of the other (“alter ego” corporations);
- Employing the same staff for two corporations or having the same location and equipment;
- Not properly issuing stock, holding board meetings or shareholder meetings, appointing officers, or meeting other corporate requirements;
- Under capitalizing or failing to capitalize a corporation;
- Using a corporation simply to transfer personal liability.
These are only some of many factors that can result in alter ego liability in California.
Consult with a San Jose Corporation Lawyer Today
If you are incorporating or own a corporation, an experienced corporate attorney can help you prevent alter ego liability should a legal issue arise. Our San Jose corporate attorneys at Structure Law Group, LLP advise clients on the best options for corporations and its’ shareholders. Call us today at 408-441-7500 or fill out an online contact form.