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LegalCornerTM - Corporations F.A.Q.'s

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Q.What does it mean to Pierce The Corporate Veil?

A.Although the law generally views a corporation as a separate legal entity, under some circumstances the courts will "pierce the corporate veil" to find that the corporate entity and its shareholders are one and the same ("Alter Ego Theory"), thus making the shareholders personally liable for all corporate debts and obligations.

Business owners who have incorporated their businesses must be aware that the law allows creditors, and other claimants, to "pierce the corporate veil" of improperly maintained corporations. When this occurs, the court will impose personal liability on the owners of the corporation. In other words, you can lose the limited liability protection you sought by incorporation in the first place.

In California, the circumstances that most often expose the owner of a corporation (its shareholders) to personal liability under the "piercing the corporate veil theory" include:

  1. Failing to issue stock.
  2. Failing to initially capitalize the corporation.
  3. Failing to keep the corporation adequately funded.
  4. Failure to keep separate corporate financial records.
  5. Commingling corporate and personal assets or funds.
  6. Complete control of the corporation by one shareholder This issue alone will not lead to a piercing of the corporate veil, but often will if coupled with other factors like failing to maintain corporate minutes.
  7. Failing to hold meetings of the shareholders/directors.
  8. Failing to maintain corporate records and minutes.

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