This is an edited version of a LinkedIn question and my answer. (They no longer are available there because LinkedIn removed its Q&A feature.) Q. In California, does suspension of a corporation automatically “pierce the corporate veil” resulting in personal liability (suspension for non-payment of taxes would seem to be the ultimate in “disregard of corporate formalities”)?
A. In my opinion, mere failure to pay taxes does not constitute disregard of corporate formalities or the basis for an alter ego finding.
Failure to pay may just mean that the corporation had no cash – a business, rather than legal, failure. Disregard of corporate formalities means factors such as failing to have appropriate internal approvals for entering into transactions, or mixing personal and corporate transactions or finances.
“Beware Your Alter Ego” describes the type of situation that results in piercing the corporate veil.
The penalties for suspension include (a) the corporation cannot defend itself if it is sued and (b) contracts are voidable by the other party.
Dana H. Shultz, Attorney at Law +1 510-547-0545 dana [at] danashultz [dot] com
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