Piercing the Corporate Veil

Generally, California corporate law encourages business ventures and entrepreneurial activity by limiting liability exposure to the assets of the corporation, should a corporation be sued.  However, this is not an absolute protection.  Courts can and will disregard the corporate entity, allowing for individual shareholders, directors or officers (i.e. the “alter-egos”) to be held liable in certain circumstances. This is known as “piercing the corporate veil.”

California courts can pierce the corporate veil when both of the following two requirements are met:

(1) Unity of Interests – The shareholders in question have treated the corporation as their “alter ego,” rather than as a separate entity; and

(2) Inequitable Result – Upholding the corporate entity and allowing for the shareholders to dodge personal liability for its debts would “sanction a fraud or promote an injustice.”

In California, courts apply a factor-by-factor test to determine whether “alter-ego” liability is apropriate.  These factors include, but are not limited to, the following:

• Absence or inaccuracy of corporate records;
• Concealment or misrepresentation of members;
• Failure to maintain arm's length relationships with related entities;
• Failure to observe corporate formalities in terms of behavior and documentation;
• Failure to pay dividends;
• Intermingling of assets of the corporation and of the shareholder;
• Manipulation of assets or liabilities to concentrate the assets or liabilities;
• Non-functioning corporate officers and/or directors;
• Significant undercapitalization of the business entity (capitalization requirements vary based on industry, location, and specific company circumstances);
• Siphoning of corporate funds by the dominant shareholder(s);
• Treatment by an individual of the assets of corporation as his/her own;
• The corporation being used as a "façade" for dominant shareholder(s) personal dealings; alter ego theory;

In practice, the alter-ego doctrine is usually applied where the shareholders have not respected their corporation’s separate identity.  This means that it is vitally important that you, as the owner(s) of a corporation, take the following steps:

1. Have a separate corporate bank account and never co-mingle personal and business funds.
2. Have annual meetings of shareholders and directors and maintain minutes for all meetings which document all major business decisions.
3. Maintain a corporate book with the bylaws, and a stock transfer ledger, and amend these documents as appropriate and necessary.
4. Issue shares of stock to all shareholders.
5. File the Statement of Information annually with the California Secretary of State.
6. Ensure that all contracts related to the business are entered into by the corporation, signed by an appropriate officer or director of the corporation, and are never signed by you as an individual.
7. Ensure that all invoices sent out by the company are in the company name.
8. Set up a business office.
9. Ensure adequate business capitalization, i.e. ensure the company has enough money and equipment necessary to start and continue operations.

Remember:  if a judge cannot distinguish between what belongs to the business and what belongs to you individually, and you cannot provide proof that all formalities have been followed, a judge can "pierce the corporate veil" and award your personal assets to any plaintiff who sues you. 
 

If you ever have questions about piercing the corporate veil, or if you need our assistance in ensuring that all corporate formalities are being followed, please do not hesitate to call Suzuki Wuori, LLP at (619) 462-0995.

Deciding Between a Will and a Trust

Suzuki Wuori, LLP recently had an article published about how to decide whether a will or trust is right for you.  Click here to read the full article.

Ensuring Your Voice is Heard When You Can't Speak

To read a great article about planning for incapacity through advance health care directives and powers of attorney click here.

Great Article on Wills

Click here to read "The Money Question" from the April 2012 issue of the Ladies' Home Journal.  This article focuses on the importance of having a will and evaluates the pros and cons of using and attorney or doing it yourself via an online service or software program.

Cohabitation Agreements: Rights & Obligations of Unmarried & Unregistered Couples

Some couples live together without having any plans to get married or register as domestic partners.  Common reasons that many couples chose to live together without any legal formalization of the relationship include the following:

·        Erroneous belief that common law marriage is recognized in California

·        Legal inability to marry (e.g., same-sex couples in California before 6/16/08, or after 11/5/08)

·        Fear that marriage will result in disqualification from or reduction in certain benefits

·        There is no final judgment terminating the prior marriage or registered domestic partnership of one of the parties

·        View that marriage is an outdated institution

·        After a number of marriages or registered domestic partnerships, a decision not to enter into a similar state-sanctioned relationship with their significant other

·        A variety of personal, political, and economic reasons

·        Belief that a marriage license or registration as domestic partners is not necessary for a couple to bond together in a lifetime commitment

·        Same-sex couples who chose not to register rather than be subject to the same rights and obligations of married persons

Due to the matters that arise when living with another person in a committed relationship, some couples desire an agreement regarding the parties’ financial matters, such as the payment of monthly household expenses, co-ownership of assets and property, and income sharing.  The agreement addressing these matters is known as a cohabitation agreement, or a Marvin agreement, named after a California Supreme Court case involving the rights and obligations of an unmarried couple.  Although the court in Marvin stated that a cohabitation agreement could be oral or written and express or implied; for ease of enforceability, agreements should be written and expressly agreed to by the parties whenever possible.  Even if parties do not want to take on any obligation for the other party, a written agreement specifying that can avoid a claim by the other party at the termination of the relationship that there was an express or implied contract created by past conduct or discussions. 

Without a cohabitation agreement, parties who live together generally do not take on any obligations of property sharing or support, there will be no presumption by a court that the parties have any such rights or duties.  Absent an agreement, each party’s property and earnings will be treated as though they had not been living with the other party.  Any agreement will not be governed by family law, but instead will be treated like a business contract between the parties.  To be enforceable, a cohabitation agreement must meet the requirements of contract law, including the requirement of consideration.

A cohabitation agreement can address the parties' respective interests in real and personal property acquired by both parties or by either party during the relationship, their interest (if any) in the income of the other party, their rights to financial support if the relationship ends, and their respective responsibilities for debts incurred before and during the relationship. 

If you would like to talk to an attorney about any of the above information, or if you need help creating a cohabitation agreement, please contact Suzuki Wuori, LLP at 619-462-0995.

The materials appearing on this blog are provided for informational use only, and are in no way intended to constitute legal advice or the opinions of Suzuki Wuori, LLP  or any of its attorneys. Transmission or receipt of any information from this website does not create an attorney-client relationship, and you should not act or rely upon any information appearing on this website without seeking the advice of an attorney.

Suzuki Wuori, LLP featured in the Mission Times Courier

Click here to read about how estate planning can be a gift to your family.

5 LEGAL MISTAKES TO AVOID WHEN FORMING A BUSINESS

Opening a business can be one of the most exciting undertakings of your life, but it can also be one of the scariest.  There are many aspects of a business that need to be considered and individuals often put off some of the important legal issues that should be addressed.  We’ve compiled a list of the five most common legal mistakes people make when forming businesses to help people avoid trouble down the road.

1.      Not Choosing the Correct Entity Type:  The most common types of business entities are sole proprietorships, corporations, limited liability companies (LLCs), limited partnerships, and general partnerships.  Some types of businesses or professions have restrictions on the types of entity available.  Each entity type has its own advantages and disadvantages; for example, some business structures (such as sole proprietorship) do not offer the personal asset protection of other types (such as a corporation).  We strongly encourage all new business owners to become familiar with each type of entity before deciding what business structure is right for their venture.  It can be difficult to change the business structure at a later date, so setting it up correctly from the beginning is imperative.  Further, once the type of entity is chosen, it is critical to follow all necessary formalities for that entity type.

2.      Failing to Document Business Partners Rights & Responsibilities: No matter how well you get along with your business partners, who may even be family or longtime friends, it is important to have a written agreement that addresses each party’s contribution (both financial and efforts), what each partner owns, and what will happen in the event of a buyout or fallout between the partners.  Another common mistake that can lead to problems is creating a 50-50 partnership because this can lead to deadlocked decisions and put the company into limbo when action is needed.  A 51-49 split usually ensures that executive decisions can always be made in a timely manner.

3.      Failure to Get a Business License.  Most businesses, no matter how big or small, are required to have some type of business license whether local, city, state and/or federal.  Generally business licenses are relatively inexpensive but the fines if it is discovered that your business is operating with the correct license(s) can be quite costly.

4.      Failure to Prepare Necessary Contracts.  Written agreements should be prepared any time that you deal with an employee or independent contractor, and with most company vendors or suppliers.  For many businesses it is critical that employees or contractors keep certain business information confidential; a written nondisclosure agreement can help to protect such information.  Basic terms and payment details should be in writing for any vendor or supplier used by your company.

5.      Ignorance of Business Law.  As the saying goes, ignorance of the law is no excuse.  Every entrepreneur should know basic contract rules such as how to protect intellectual property through patent, trademark and copyright law, basic employer-employee law, and governmental regulation of his/her business type.  Being familiar with these types of issues and how they will affect your business may prevent litigation which can destroy a small business.

If you are starting a California business and would like to talk to an attorney about any of the above, or if you need help forming a business entity, please contact Suzuki Wuori, LLP at 619-462-0995.

The materials appearing on this blog are provided for informational use only, and are in no way intended to constitute legal advice or the opinions of Suzuki Wuori, LLP  or any of its attorneys. Transmission or receipt of any information from this website does not create an attorney-client relationship, and you should not act or rely upon any information appearing on this website without seeking the advice of an attorney.