Incorporate with no significant assets

[thenomad]

What is the name of your state? CA

In a fictional scenario, let's say I have a business which has been incorporated in the Golden State. I am starting the business and have no assets belonging to the corporate other than few hundred dollars in the bank to cover expenses. But onthe other side, I have about $250,000 equity in my personal property and several thousand dollars in the bank under my name in personal accounts.

Let's say my company is John's Carpentry.
Let's say Bill hired me to build a wall entertainment cabinet.
I finished the job.
Bill was happy. Signed release papers and paid me $1500.
3 months later, Bill wanted to sell his property.
Inspectors found that the palcement of the unit is not upto the building code.
Bill sued me for $10,000 for the loss of sale and profit
Corporate has only 300 dollars in the bank at this time with no prospect of putting significant amount of money into the bank to cover what Bill is asking for
Let's say Judge ruled in Bill's favor

What happens other than most probably tarnishing the reputation of my business and losing my $300 ? Can they come after my personal assets ? If yes, to what extent ?

Also, if my company was not Incorporated but just a simple LLC, what would be the situation ?

 

[divgradcurl]

What is the name of your state? CA

In a fictional scenario, let's say I have a business which has been incorporated in the Golden State. I am starting the business and have no assets belonging to the corporate other than few hundred dollars in the bank to cover expenses. But onthe other side, I have about $250,000 equity in my personal property and several thousand dollars in the bank under my name in personal accounts.

Let's say my company is John's Carpentry.
Let's say Bill hired me to build a wall entertainment cabinet.
I finished the job.
Bill was happy. Signed release papers and paid me $1500.
3 months later, Bill wanted to sell his property.
Inspectors found that the palcement of the unit is not upto the building code.
Bill sued me for $10,000 for the loss of sale and profit
Corporate has only 300 dollars in the bank at this time with no prospect of putting significant amount of money into the bank to cover what Bill is asking for
Let's say Judge ruled in Bill's favor

What happens other than most probably tarnishing the reputation of my business and losing my $300 ? Can they come after my personal assets ? If yes, to what extent ?

Also, if my company was not Incorporated but just a simple LLC, what would be the situation ?

In both cases, it is likely that the judgment creditor could come after your personal assets by "piercing the corporate veil." In other words, you can't throw up a "sham" corporate entity in an attempt to simply shield your personal assets -- the corporate entity has to actually BE a functioning corporation or LLC to provide the shield you are looking for. Undercapitalization of a corporate entity is one the primary reasons, if not THE primary reason, that courts will "pierce the corporate veil" and go after assets of the owners themselves.

If you want protection, you will need to capitalize the corporate entity, and you will need to keep the corporate entity (either corporation of LLC) separate from your personal life -- separate bank accounts, etc. -- and no writing checks for personal expenses from your LLC account, and so on. Talk with an attorney about how best to form your LLC or corporation to provide the limited liability protection you are seeking.

 

[azatty]

It's a "totality of the circumstances" test. "Alter ego is an extreme remedy, sparingly used." Calvert v. Huckins, 875 F.Supp. 674, 677 (E.D.Cal.1995)

For a cogent discussion of the veil piercing doctrine, see Sonora Diamond Corp. v. Superior Court, 83 Cal.App.4th 523, 99 Cal.Rptr.2d 824 (Cal.App. 5 Dist.,2000):

"In California, two conditions must be met before the alter ego doctrine will be invoked. First, there must be such a unity of interest and ownership between the corporation and its equitable owner that the separate personalities of the corporation and the shareholder do not in reality exist. Second, there must be an inequitable result if the acts in question are treated as those of the corporation alone. Automotriz etc. De California v. Resnick, 47 Cal.2d 792, 796, 306 P.2d 1 (1957); Hennessey's Tavern, Inc. v. American Air Filter Co. 204 Cal.App.3d 1351, 1358, 251 Cal.Rptr. 859 (1988); Alberto v. Diversified Group, Inc., 55 F.3d 201, 205 (5th Cir.1995); Calvert, supra, 875 F.Supp. at p. 678.)

Among the factors to be considered in applying the doctrine are commingling of funds and other assets of the two entities, the holding out by one entity that it is liable for the debts of the other, identical equitable ownership in the two entities, use of the same offices and employees, and use of one as a mere shell or conduit for the affairs of the other. Other factors which have been described in the case law include inadequate capitalization, disregard of corporate formalities, lack of segregation of corporate records, and identical directors and officers. No one characteristic governs, but the courts must look at all the circumstances to determine whether the doctrine should be applied. Talbot v. Fresno-Pacific Corp. 181 Cal.App.2d 425, 432, 5 Cal.Rptr. 361 (1960).

The alter ego doctrine prevents individuals or other corporations from misusing the corporate laws by the device of a sham corporate entity formed for the purpose of committing fraud or other misdeeds."
...

"The alter ego doctrine does not guard every unsatisfied creditor of a corporation but instead affords protection where some conduct amounting to bad faith makes it inequitable for the corporate owner to hide behind the corporate form. Difficulty in enforcing a judgment or collecting a debt does not satisfy this standard." (citations omitted)

Although inadequate capitalization is a factor in determining whether an entity is the alter ego of its shareholders, it is only one factor. "To be sure, it is an important factor, but no case has been cited, nor have any been found, where it has been held that this factor alone requires invoking [the doctrine of piercing the corporate veil.]" Associated Vendors, Inc. v. Oakland Meat Co., 210 Cal.App.2d 825, 26 Cal.Rptr. 806 (Cal.App. 1963).

Under the hypothetical proposed, it is unlikely a court would pierce the veil. There is no evidence of misconduct, fraud, or bad faith. John placed a cabinet in a house; Bill was happy with the work. The Building Code happened to ambush both of them. Certainly, John MAY have been negligent in placing the cabinet. But there's no evidence that John intentionally misplaced the cabinet, took the action in bad faith or with an evil mind, or that it would somehow be unjust to allow the corporate entity to stand.

Of course, this may all be a tempest in a teapot because John could be held personally liable on a negligence theory anyway. John performed the services himself. He may have been acting for the corporation, but anytime you have services being rendered, the individual performing them has a separate duty of care that is independent of the corporation's duty. No need to pierce the veil here; John's on the hook already. That's why John should carry liability insurance.

Same answer for the LLC. However, of the few LLC veil piercing cases that have been filed, an even smaller number have allowed veil piercing. In the cases of which I'm aware, the veil was pierced because the members had actively engaged in fraudulent conduct.

 

[clueless3]

There is no clear-cut fraudulent activity; there is no fraudulent transfer of fund out of the corporation in time of stress. The other lawyer can try to pierce the corporate veil, but since there is no clear-cut fraud, the case can't be put forward.

The other side can try to collect on the judgement.

The contractor should have sufficient insurance, however.

 

[Shay-Pari'e]

There is no clear-cut fraudulent activity; there is no fraudulent transfer of fund out of the corporation in time of stress. The other lawyer can try to pierce the corporate veil, but since there is no clear-cut fraud, the case can't be put forward.

The other side can try to collect on the judgement.

The contractor should have sufficient insurance, however.

What is your problem? Seeking out any old post that you can?