While there may be financial benefits to operating businesses without infrastructure or corporate formalities, this can lead to the legal disregard of separateness. For example, related companies may share resources and freely transfer assets, or use the same bank accounts, which may result in cost savings. But these activities may trigger a court to “pierce the corporate veil,” by treating two separate entities, including corporations, partnerships, and individuals, as one when assessing liability in legal proceedings.
Courts have found that separate entities should be treated as one where:
- There be such unity of interest in ownership that the separate personalities of the corporation and the individual no longer exist; and
- If the acts are treated as those of the corporation alone, an inequitable result will follow.
Sonora Diamond Corp. v. Superior Court, 83 Cal. App. 4th 523 (2000), citing Automotriz Del Golfo de California v. Resnick, 47 Cal. 2d 792 (1957).
Factors courts have considered in making this evaluation include the following:
- Commingling of funds and other assets.
- Failure to segregate funds.
- Unauthorized diversion of corporate funds or assets (other than corporate uses).
- The treatment by an individual of the assets of the corporation as his own.
- Failure to obtain authority to issue stock or to subscribe to or issue the same.
- The holding out by an individual that he is personally liable for the debts of the corporation.
- Failure to maintain minutes or adequate corporate records.
- Confusion of the records of the separate entities.
- The identical equitable ownership in the two entities.
- The identification of the equitable owners thereof with the domination and control of the two entities.
- Identification of the directors and officers of the two entities in the responsible supervision and management.
- Sole ownership of all the stock in a corporation by one individual or the members of the family.
- The use of the same office or business location.
- The employment of the same employees and/or attorneys.
- The failure to adequately capitalize a corporation.
- The total absence of corporate assets and undercapitalization.
- The use of a corporation as a mere shell, instrumentality or conduit for a single venture.
- The use of a corporation as a mere shell, instrumentality or conduit for the business of an individual or another corporation.
- The concealment and misrepresentation of the identity of the responsible ownership, management and financial interest.
- Concealment of personal business activities.
- The disregard of legal formalities.
- The failure to maintain arms-length relationships among related entities.
- The use of the corporate entity to procure labor, services or merchandise for another person or entity.
- The diversion of assets from a corporation by or to a stockholder or other person or entity, to the detriment of creditors, or
- The manipulation of assets and liabilities between entities so as to concentrate the assets in one and the liabilities in another.
- The contracting with another with the intent to avoid performance by use of a corporate entity as a shield against personal liability, or
- The use of a corporation as a subterfuge of illegal transactions.
- The formation and use of a corporation to transfer to it existing liabilities of another person or entity.
Associated Vendors, Inc. v. Oakland Meat Co., Inc., 210 Cal. App. 2d 825, 838-40 (1962).
Hemming Morse’s professionals have experience in evaluating accounting, financial, and business operations factors such as these to assist the court in evaluating whether two or more entities should be treated as one when assessing liability. With experience in the preparation and analysis of financial statements, creation of business processes, analysis of transactions and business records supporting them, and the perspective of having professionals who have looked at a wide range of companies over decades of practice performing accounting investigations, Hemming Morse’s professionals are well suited to provide insight and perspective to assist in making this analysis, whether it be in the context of an alter-ego claim, integrated enterprise, successor liability, or the Uniform Fraudulent Transfer Act.
Labor Law Claim Against Restaurant Management Company, Owners, and Restaurants
After an employee of a restaurant was denied a transfer to another restaurant under partial common ownership, she brought a claim against the owners of each restaurant, the company that provided shared restaurant management services, and individuals. A Hemming Morse expert performed an investigation of alter-ego factors and integrated enterprise factors from an accounting, financial, and business operations perspective to assist the court in making its evaluation of whether these entities should be treated as one when assessing liability, providing testimony in a deposition and at trial