The allegations are known as piercing the corporate veil because they are used to "pierce the corporate veil" and allow a plaintiff to add an individual person, or persons, or even another corporation as a defendant and seek to hold them responsible for the debt of the main corporation.
Alter ego allegations are generally used against smaller corporations, particularly corporations with only one or two owners. However, they can also be used against Limited Liablity Companies in California pursuant to California Corporations Code Section 17101(b).
The author recently drafted a complaint with alter ego allegations against an individual who was the managing member of a California Limited Liability Company on the grounds that this particular managing member took the proceeds from a business loan and deposited them into their personal bank account.
There are two main requirements of alter ego liability in California as stated by a California Court of Appeal.
There must be such unity of interest and ownership that the separate personalities of the corporation and individual no longer exist, and that if the acts are treated as those of the corporation alone, it would sanction a fraud or promote injustice to uphold the corporate entity and allow the shareholders to escape personal liability for the debt. See Associated Vendors Inc. v. Oakland Meat Co. (1962) 210 Cal. App. 2d 825, 836.
Another California Court of Appeal stated that alter ego liability is premised upon the notion that when a corporation is used by an individual or individuals, or by another corporation, to perpetrate a fraud, circumvent a statute, or accomplish some other wrongful or inequitable purpose, a court may disregard the corporate entity and treat the acts as if they were done by the individuals themselves. See Kohn v. Kohn (1950) 95 Cal. App. 2d 708, 717-720.
A party cannot totally avoid the possibility that someone may seek to hold them personally liable for the debts for a corporation which they own or control. However, if they just keep in mind the fact that if they want their business to be treated like a corporation they need to act like a corporation with totally separate bank accounts, hold all required directors’ and shareholders meeting, and keep accurate records and/or minutes of any corporate meetings.
Attorneys or parties in California who would like to view a sample complaint for California that includes alter ego or corporate veil piercing allegations sold by the author can use the link shown below.
Sample California complaint with alter ego allegations
The author of this blog post, Stan Burman, is an entrepreneur and freelance paralegal who has worked in California and Federal litigation since 1995 and has created over 235 sample legal documents. Visit his website at LegalDocsPro website and his Facebook page at Facebook page
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DISCLAIMER:
Please note that the author of this blog post, Stan Burman is NOT an attorney and as such is unable to provide any specific legal advice. The author is NOT engaged in providing any legal, financial, or other professional services, and any information contained in this blog post is NOT intended to constitute legal advice.
The materials and information contained in this blog post have been prepared by Stan Burman for informational purposes only and are not legal advice. Transmission of the information contained in this blog post is not intended to create, and receipt does not constitute, any business relationship between the author and any readers. Readers should not act upon this information without seeking professional counsel.
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