I've owned my own corporation since 2002, and I'm the only shareholder. I do my business under the corporation, but I've neglected to keep up with formalities. It's been years since I held an annual shareholder meeting, and I've never even issued myself shares.
I'm now facing a situation where the corporation may be faced with a lawsuit soon. I've read all about piercing the corporate veil, and from what I gather, I can be held personally liable for corporate debt if I don't maintain corporate formalities. If I start running the corporation correctly (i.e., issue shares, hold my annual meeting, etc.), will it make up for the fact that I haven't done so for the past several years? What can I do to avoid piercing?
Real Estate Attorney
Relax. There is a difference between formalities and trivialities. The law understands that forcing your to meet with yourself formally does not benefit anyone. The term "meeting" implies the existence of two parties.
Other factors are much more important. Is your corporation adequately capitalized for the level of business, or is it a shell? Have you used its property for your personal benefit without paperwork showing a dividend or salary? Have you expended personal funds, without paperwork showing an investment or loan? These formalities are much more important than whether the corporation has issued shares.
Consult a business attorney for advice on running it consistently with its corporate status.
Unfortunately, it is not possible (especially on a public forum such as Avvo) to give you an opinion on what you might still be able to do now to avoid alter ego liability. There are many factors, some which you can change (corporate minutes), others which you cannot change after the fact (such as undercapitalization and commingling of funds).
Generally speaking, the alter ego doctrine can be used to "pierce the corporate veil" to obtain personal liability against individuals who own and control a corporation. In order to raise an alter ego allegation, a plaintiff must provide sufficient facts to show that:
(1) the corporation is not only influenced and governed by a person, but also that there is such a unity of interest and ownership that the individuality, or separateness, of such person and the corporation has ceased and
(2) an adherence to the fiction of the separate existence of the corporation would, under the particular circumstances, sanction a fraud or promote injustice.
(Associated Vendors, Inc. v. Oakland Meat Co. (1962) 210 Cal.App.2d 825, 837.)
Factors which have been described in the case law include inadequate capitalization, disregard of corporate formalities, lack of segregation of corporate records, and identical directors and officers. No one characteristic governs, but the courts must look at all the circumstances to determine whether the alter ego doctrine should be applied.
Frank W. Chen has been licensed to practice law in California since 1988. The information presented here is general in nature and is not intended, nor should be construed, as legal advice for a particular case. This Avvo.com posting does not create any attorney-client relationship with the author. For specific advice about your particular situation, please consult with your own attorney.
Failing to maintain your corporate records is only one of the factors that are considered when it comes to piercing the corporate veil. There are other factors such as comingling funds and inadequate capitalization for example. I suggest you meet with a Business Attorney to discuss your current situation as there are things can be done to help avoid a potential plaintiff from successfully piercing your corporate veil. I would be more than happy to meet with you for a free consultation.
As my colleagues have mentioned, there are many factors that can go into piercing the corporate veil and whether you adhered to the corporate formalities. Generally, you're better off if you do and, generally, there are some things that you can do to "catch up." And, indeed, you should consult a lawyer to learn how to catch up and do what you can.
The other huge question is what type of lawsuit your corporation is facing and whether it is for conduct that could subject the owner to individual liability. For example, in some wage and hour matters, it's difficult to hold the owners liable. Also, your corporation may have sufficient insurance to cover that risk.
Sorry that you're facing this risk and hope it works out for you.
If your company is sued (and I hope it isn't), I have put together a blog that describes some of the first steps to consider doing. I wrote this based on questions asked by my clients and to avoid some of the mistakes I had seen.
I don't intend the foregoing to be legal advice but just a general answer to a question based on Avvo's rules. In particular, you are not my client. I am not your lawyer. For further details on this issue, you should consult an attorney.
I agree with my colleagues and will add the following:
1. Mere paperwork problems probably are not enough to create unlimited personal liability. Please see the post at the link below.
2. It is never too late to fix that paperwork. I am working with a client to overcome decades of neglect concerning four entities - one corporation, one LLC, and two limited partnerships. Retain an experienced local business lawyer to help you ASAP. You will feel much more relaxed as a result.
This information does not constitute legal advice and does not establish an attorney-client relationship.
What kind of corporation do you have? Are you a C corporation? S corporation? Those have enormous tax differences and formalities. Just remember that piercing the corporate veil is a discretionary issue. So, if you have corporate bank accounts, generally keep your act together and don't have the appearance of abusing the corporate form to hide assets, then the risk of the piercing is lower.