Undercapitalization
Undercapitalization
- Undercapitalization is the failure of a corporation to maintain
sufficient capital to meet its financial responsibilities. Lawsuits seeking to
pierce the corporate veil or allege alter ego liability care little whether or
not the undercapitalization was unintentional.
California courts summarize this issue quite well as follows:
"It is true that undercapitalization alone does not necessarily dictate that the corporate veil should be pierced. (Harris v. Curtis (1970) 8 Cal.App.3d 837, 841, 843.)
However, "If a corporation is organized and carries on business without substantial capital in such a way that the corporation is likely to have no sufficient assets available to meet its debts, it is inequitable that shareholders should set up such a flimsy organization to escape personal liability. The attempt to do corporate business without providing any sufficient basis of financial responsibility to creditors is an abuse of the separate entity and will be ineffectual to exempt the shareholders from corporate debts. It is coming to be recognized as the policy of the law that shareholders should in good faith put at the risk of the business unincumbered capital reasonably adequate for its prospective liabilities. If the capital is illusory or trifling compared with the business to be done and the risks of loss, this is a ground for denying the separate entity privilege."'" (Temple v. Bodega Bay Fisheries, Inc. (1960) 180 Cal.App.2d 279, 283-284)."
"The court found the sole shareholder and chief executive officer of a corporation was the corporation's alter ego, " because "the evidence disclosed that the shareholder had depleted the corporate assets by receiving loans and using corporate monies to pay for his personal expenses." (NEC Electronics Inc. v Hurt (1989) 208 Cal.App.3d 772)
"The equitable owners of a corporation . . . are personally liable when they treat the assets of the corporation as their own and add or withdraw capital from the corporation at will [citations]; . . . or when they provide inadequate capitalization and actively participate in the conduct of corporate affairs." (Minton v. Cavaney (1961) 56 Cal.2d 576, 579-580)."
Disclaimer: The foregoing is intended to provide general information and may not be suitable in specific instances. The glossary information is not intended to be exhaustive, but rather to illustrate typical considerations. The material is provided with the understanding that it is not legal, accounting, tax or any other professional advice.
Copyright © 2003-2010 LawVantage.com, LLC. All rights reserved.
Important LawVantage.com, LLC and its website, CorporateBoardMinutes.com, do not render any legal, accounting or other consulting advice.
For legal advice, you should always consult with a qualified attorney-at-law.
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California courts summarize this issue quite well as follows:
"It is true that undercapitalization alone does not necessarily dictate that the corporate veil should be pierced. (Harris v. Curtis (1970) 8 Cal.App.3d 837, 841, 843.)
However, "If a corporation is organized and carries on business without substantial capital in such a way that the corporation is likely to have no sufficient assets available to meet its debts, it is inequitable that shareholders should set up such a flimsy organization to escape personal liability. The attempt to do corporate business without providing any sufficient basis of financial responsibility to creditors is an abuse of the separate entity and will be ineffectual to exempt the shareholders from corporate debts. It is coming to be recognized as the policy of the law that shareholders should in good faith put at the risk of the business unincumbered capital reasonably adequate for its prospective liabilities. If the capital is illusory or trifling compared with the business to be done and the risks of loss, this is a ground for denying the separate entity privilege."'" (Temple v. Bodega Bay Fisheries, Inc. (1960) 180 Cal.App.2d 279, 283-284)."
"The court found the sole shareholder and chief executive officer of a corporation was the corporation's alter ego, " because "the evidence disclosed that the shareholder had depleted the corporate assets by receiving loans and using corporate monies to pay for his personal expenses." (NEC Electronics Inc. v Hurt (1989) 208 Cal.App.3d 772)
"The equitable owners of a corporation . . . are personally liable when they treat the assets of the corporation as their own and add or withdraw capital from the corporation at will [citations]; . . . or when they provide inadequate capitalization and actively participate in the conduct of corporate affairs." (Minton v. Cavaney (1961) 56 Cal.2d 576, 579-580)."
Disclaimer: The foregoing is intended to provide general information and may not be suitable in specific instances. The glossary information is not intended to be exhaustive, but rather to illustrate typical considerations. The material is provided with the understanding that it is not legal, accounting, tax or any other professional advice.
Copyright © 2003-2010 LawVantage.com, LLC. All rights reserved.
Important LawVantage.com, LLC and its website, CorporateBoardMinutes.com, do not render any legal, accounting or other consulting advice.
For legal advice, you should always consult with a qualified attorney-at-law.
Website development by
Vine Design.