For any business operating in and around Los Angeles, taking steps to mitigate the risk of legal liability is critically important. One of the most common methods for protecting a business from such liability is structuring the corporate entity in a manner that protects it from a court “piercing the corporate veil.”
For context, the term “piercing the corporate veil” refers to the situation where a court decides to ignore a recognized liability shield (the entity) and find a company’s shareholders or directors personally liable for the company’s actions and/or debts.
Courts are inclined to pierce the corporate veil when a parent company exerts excessive control over a subsidiary. If the parent company has total domain over a subsidiary, a court may determine that piercing the corporate veil is warranted and hold the parent company responsible for the subsidiary’s debts and actions. This is why it is important for parent companies to maintain an “arms-length” business relationship with subsidiary companies.
Tips to Help to Prevent Courts from Piercing the Corporate Veil
If you own a company and are considering establishing a subsidiary, below are some steps you can take to mitigate the risk of a court piercing the corporate veil.
- Maintain separate financial records and bank accounts for each entity: Having separate payroll, balance sheets, and bank account can help show that the companies are separate working entities.
- Properly capitalize each subsidiary: When a parent company establishes a subsidiary, they need to make sure the subsidiary has sufficient capital to stand on its own. If a company is not properly funded, it could be seen as simply transferring money to the parent company.
- Maintain separate insurance policies for each subsidiary company: Maintaining separate insurance policies can help strengthen a defense that each company is run independently and weaken a claim that piercing the corporate veil is necessary to ensure just damages.
- Keep the board of directors separate for each corporate entity: Having a separate board of directors can help in showing a court that a subsidiary company’s decisions were not governed by the exact same individuals who operate the parent company.
- Adhere to the provisions in each operating agreement or bylaws: Adhering to the provisions in each entity’s operating agreement or bylaws, as applicable, is extremely important to maintain a level of independence for each entity. For example, each corporate subsidiary should hold annual shareholder meetings and keep detailed meeting minutes that are signed by the directors and officers.
By taking a few precautionary steps, you can reduce the risk of having a court pierce the corporate veil by properly setting up your companies and having strong legal foundations.
Have Questions? Contact an Experienced Business Lawyer in Los Angeles
If you have questions about protecting your parent company and subsidiaries, then now is the time to contact the Hakim Law Group. We are a corporate law firm in Los Angeles geared toward helping business owners tackle complex legal and regulatory matters. Our business law firm was founded on the premise that experience matters. We are laser focused on providing the highest levels of representation in addressing the legal and business challenges facing our clients today, tomorrow, and in the future.
Our team of skilled and highly reputable Los Angeles business attorneys have worked at top-tier international law firms and served as general counsel to major companies. This high level of diverse legal and business experience is paramount to our boutique approach.
For additional information or to schedule an appointment, please contact the attorneys from Hakim Law Group at (310) 993-2203 or visit www.HakimLawGroup.com to learn more.
