Piercing the Corporate Veil
Most apparent exceptions to the protection from the liabilities for corporations or LLCs are not true exceptions. If an owner signs guarantee for bizniz’s performance, they are liable on the guarantee. But where the owner is personally involved in the tort (e.g., crashing their corporate car into another driver or setting an illegal policy) they might be liable on the tort, but it is due their personal involvement.
In an influential 1962 decision, Associated Vendors, Inc. v. Oakland Meat Co., 210 Cal.App.2d 825, the California appellate court listed numerous non-exclusive factors that can support alter ego piercing.
- commingling of funds & assets, including failing to segregate funds of separate entities & unauthorized diversion of corporate assets for non-corporate uses;
- owner treating assets of the corporation as their personal assets;
- failing to obtain authority to issue stock;
- causing confusion over the difference between the corporation & the owner such as through the owner holding self out as personally liable for corporate debts, failing to maintain minutes or corporate records, & confusing records of separate entities;
- identical ownership in multiple entities; identification of equitable owners thereof with domination & control of two entities; identification of directors & officers of multiple entities in responsible supervision & management; sole ownership of all stock in a corporation by one person or family;
- use of same office/business location; employing same employees/attorney;
- failure to adequately capitalize corporation
- use of corporation as a mere shell, instrumentality or conduit for a single venture or business of an individual or another corporation;
- concealment & misrepresentation of identity of responsible ownership, management & financial interest of business activities;
- disregard of legal formalities & failure to maintain arm’s length relationships among related entities;
- use of corporate entity to procure labor, services or merchandise for another person or entity;
- diversion of assets from corporation to detriment of creditors; manipulation of assets & liabilities between entities so as to concentrate assets in one entities & liability in another;
- contracting with intent to avoid performance by use of corporate entity as a shield against personal liability, or use of corporation as a subterfuge for illegal transactions; &
- formation & use of a corporation to transfer to it existing liability of another.
The law of the place of incorporation is generally used in determine whether two entities are alter egos. Delaware’s LLC Act is widely regarded as quite strong. As Delaware’s Chancery Courts have observed about themselves:
“Persuading a Delaware Court to disregard the corporate entity is a difficult task.”
By contrast, the large number of factors considered by California courts is perhaps one reason California is considered to be a less than ideal location for corporation & a comparatively hospitable forum for alter ego attacks. Particularly if an entity is incorporated in California or likely to be sued in California, owners are advised to exercise diligence by:
- complying with corporate & LLC formalities & maintaining financial integrity
- adequately capitalizing the entity & each subsidiary
- documenting intercompany transactions & making sure they are fair
- purchasing reasonable insurance
- ensuring subsidiaries conduct their business separately & without excessive day-to-day control by the parent
- maintaining strictly separate bank accounts
- ideally avoiding identical officers & directors by having at least one independent member focusing on that subsidiary
- ideally maintaining separate offices, phone numbers, logos, employees, employee handbooks, etc.