Frazee Law handles litigation regarding any issues connected with business law and business litigation. Most litigation issues involve contract disputes. California law is strict on the formation of contracts. Frazee Law Group has both collected and defended breach of contracts claims for disputes over $10,000. Under $10,000 disputes are handled in small claims court without an attorney participation.
Many business owners are in partnerships, proprietorships, corporations or Limited Liability Corporations. Both a corporation and a limited liability corporation can shield a person from liability and may offer tax advantages. Quite often corporations are formed through accountants and on-line services. But the services often fail to complete all the steps necessary to shield the corporation from lawsuits. If not properly formed, then the corporate veil may be pierced. To pierce the corporate veil means the members, officers, or shareholder lose their protection of being a corporate entity.
Can you give me plain English definitions for the following: (1) a closely held corporation, (2) a personal holding company, and (3) a personal service corporation? Answer
Operation of Corporations (also called “Inc.” or “Corp.”)
To maintain corporate status, the corporations must operate as a separate entity from the officers or shareholders (known as owners as they own shares of the corporation). The corporations must maintain separate accounting books and bank accounts. The corporations must pay the shareholders and officers as if an employee not as an owner. If the shareholder and officers work for the corporation and are not paid, then the corporation must provide records of owing the workers such as promissory notes. The corporation must elect a board of directors and hold annual meetings both for the board of directors and for the shareholders.
Operation of Limited Liability Corporation (also called “LLC”)
A limited liability corporation has more flexibility and fewer corporate formalities than a corporation. While corporations are required to have annual meetings, LLC members are not required to hold annual meetings. However, an LLC must adopt an operating agreement and select a manager or members to operate the business on a day-to-day basis instead of officers.
Corporations can be open to personal liability, meaning that the officers, shareholders or members may be held liable for the corporate debt or wrongdoing, the very reason for forming a corporation. A corporate veil can be placed over a corporation to prevent the individuals of the corporations from being responsible for the actions of the corporation. However, the corporate veil may be pierced making the corporation vulnerable to personal liability by several factors. Over 20 factors may be considered in determining the existence of personal liability. The most common factors are: not keeping separate bank accounts or other assets, the use of funds for something other than corporate uses, failure to maintain adequate corporate records, failure to adequately fund a corporation to operate business, the use of a corporation as a mere shell with no funds, failing to perform corporate business requirements and the list goes on.
“Alter Ego” Liability
Corporations can be open to “alter ego” liability, meaning that the officers, shareholders, or members may be held liable for the corporate debt or wrongdoing, the very reason for forming a corporation. A corporate veil can be placed over a corporation to prevent the individuals of the corporations from being responsible for the actions of the corporation. However, the corporate veil may be pierced making the corporation vulnerable to “alter ego” liability by several factors. Over 20 factors may be considered in determining the existence of “alter ego” liability.
“Alter Ego” Liability most common factors are:
- Commingling of funds or other assets
- The use of funds for something other than corporate uses,
- Failure to maintain adequate corporate records and/or confusion of the recorders of the separate entities
- Identifications of the directors or officers of the corporations
- Failure to adequately capitalize a corporation
- The use of a corporation as a mere shell
- The list goes on
Attorney RoseAnn Frazee was an officer of a corporation for years ago, understands business operations and can assist a client in litigation and business structures. She can help you with proprietorship, partnership or corporation in any manner.
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