The Factors That the Court Will Look at to Determine Whether the Corporate Veil Can Be Pierced

UCSD BuildingIn my last article, I wrote about some of the circumstances in which business creditors can pierce the corporate veil and seek to recover debts from stockholders. Often, the court will allow creditors to do so because the nature of corporate entities were disregarded. In this article, we will look at the specific factors that the court often uses to test whether a corporation may be regarded as the alter ego of an individual, a term used to describe a situation where there is no distinction between the stockholder and the corporation. The underlying reasoning of the court seems to be that if you don’t think it is important to treat a corporation as a separate entity then maybe you are not serious about having the protection that the law provides and, hence, creditors can seek the repayment of debts from stockholders.

Please note that these factors necessarily vary according to the circumstances of each case and no one factor is more important than the others—the court will always examine all the factors before making any determination. The court may regard a corporation as the alter ego of the individual for any of the following reasons:

  1. Mingling of personal and corporate funds and treating the corporate accounts as your personal ones
  2. Treating the corporate assets as personal assets
  3. Failing to obtain authorization before issuing the stocks of the corporation
  4. Making yourself the personal guarantor of the corporate debts
  5. Failing to maintain adequate corporate records, resulting in confusion about whether the corporation is a separate entity
  6. Control of the corporation by any one shareholder
  7. No clear identification as to who the corporation’s officers and directors are
  8. The existence of a sole shareholder
  9. Operating the business from a personal home address
  10. Funding of the corporation as a shell when it was established rather than adequately funding it
  11. Using the corporation as a shell, the purpose of which is to engage in single business transaction
  12. Attempting misrepresentation of the business activities, the corporate reports, or the ownership of the corporation
  13. Not treating the corporation as if it were a third person whom you don’t know well
  14. Using the corporate name to secure services, goods, or labor from others for personal purposes
  15. Transferring the corporation’s assets to avoid creditors
  16. Forming the corporation to defraud others, with no intention of performing the promised function
  17. Forming the corporation to receive the existing corporate debts of other entities

To do business as a corporate entity, the most important thing is to shield your personal assets from the reach of business creditors. You are already taking a calculated risk by engaging in your business ventures, and although it is often a rewarding venture, you don’t need to take unnecessary risks. If you have any questions about asset protection strategies, contact our office today.