Piercing the corporate veil in California

[Ryan Fox]

There seems to be a lot of confusion on BP as to how you lose the protections of an LLC or business entity. In legal terms, this is called "piercing the corporate veil." A business entity can shield you from liabilities and debts. However, I wanted to explain specifically how veil piercing works in California so it doesn't happen to you.

Let's say you have a California investor who has a California LLC. The LLC gets sued. Can the plaintiff pierce the veil of the LLC and hold the investor personally liable? In order for the plaintiff to do that, the plaintiff must prove two things:

• there must be a unity of interest and ownership such that the separate personalities of the entity and the owner no longer exists; and
• an inequitable result will follow if the acts are treated as those of the entity alone.

Unity of Interest and Ownership

These are factors the plaintiff could use to show a unity of interest and ownership exists:

• one individual's ownership of the entire entity;
• use of the same office or business location by the LLC and owner;
• commingling of funds and other assets of the owner and the entity;
• an individual holding out that he / she is personally liable for debts of the corporation;
• failure to maintain minutes or adequate corporate records;
• disregard of corporate formalities;
• absence of corporate assets and inadequate capitalization; and
• the use of an entity as a mere shell, instrumentality or conduit for the business of an individual.

Importantly, no single one of these factors is determinative, but the court must examine all the circumstances to determine whether the “unity of interest” test is met.

Inequitable Result

The test for this requirement is simply that an inequitable or unjust result would take place if the corporate protection is honored.

Note: the above analysis pertains only to California.  That's where I've litigated cases about veil piercing and that's what I'm familiar with.  The standard may be different in other states.

I’m happy to answer any questions you may have on this topic.

*This is meant for informational purposes only.  It is not legal advice.  It does not create an attorney-client relationship.

[Ryan Fox]

@Account Closed- Having an operating agreement helps strengthen the limited liability of the LLC. It's a "corporate record" that will often explain that the LLC offers limited liability to the member(s) and that it was created for that purpose. An operating agreement offers additional benefits if there are multiple members of the LLC.

Taxes are not really my area, so maybe other qualified individuals can take a stab at those questions.

Does transferring ownership (selling the LLC with the property in it) by LLC violate the Due on Sale clause on the mortgage? This assumes that title was already in the name of the LLC. I can't really assume I know the language of any due on sale clause out there. All due on sale clauses can be phrased differently. A due on sale clause for a DSCR loan is going to be different than a DOS clause for a conventional mortgage. It's going to depend on the particular language of the DOS clause. There may be other clauses in the loan documents that are violated in this scenario.

*This is for informational purposes only.  It is not intended as legal advice.  It does not create an attorney-client relationship.