Alter Ego and Shareholder Liability
With Alter Ego Doctrine, Corporate Owners/Shareholders Can Be Held Personally Responsible For The Corporation’s Debts And Obligations
It is a general rule of law that a corporation is a separate legal entity distinct from its shareholders, who are not responsible for the debts and obligations of the corporation. However, what if a corporation that owes you money is a sham, separate from its owners only on paper, or used by its owners to defraud creditors. Can you collect from the corporation’s owners?
The business litigation attorneys of Brown & Charbonneau, LLP can help. Under the “alter ego” doctrine, the law may disregard a corporation’s separate existence and hold its owners personally responsible for corporate debts when necessary to prevent fraud and accomplish justice. We have experience going to trial on these issues and have litigated the nuances and potential pitfalls for the inexperienced.
The “Alter Ego” Doctrine
The “alter ego” doctrine refers to a rule of law developed by the courts that allows for the obligations of a corporation to be treated as those of its shareholders. The alter ego doctrine disregards the separate legal existence of the corporation, and therefore is sometimes described as “piercing the corporate veil.”
Before the acts and obligations of a corporation can be legally treated as those of a particular person, it must be established that the corporation is not only influenced by that person, but also that any individuality or separateness between person and corporation has ceased (or never existed), and that under the circumstances, recognizing the separate legal existence of the corporation would result in fraud or promote injustice.
There are several factors, which the courts have considered in deciding whether or not to apply the alter ego doctrine. These factors have included:
- Failing to keep corporate and individual funds and other assets separate;
- Using corporate funds or assets for individual (non-corporate) purposes;
- Transferring corporate funds or assets to avoid corporate debts;
- Failing to adequately capitalize the corporation so that it has sufficient assets available to meet corporate debts;
- Representations by an individual that he or she is personally responsible for the debts of the corporation; and
- Failing to follow corporate formalities such as the holding of board of directors and shareholder meetings, and maintaining adequate minutes or other corporate records.
The purpose of the alter ego doctrine is not to protect every unsatisfied creditor, but rather to give him protection when some bad faith conduct makes it unjust or inequitable for the shareholders to hide behind the corporation. Generally, several of the above factors have been found to be present in those cases where the courts determined application of the alter ego doctrine to be appropriate. However, they remain only factors to be considered by the courts, and no single factor is required or controlling.
Getting Legal Help
Call us today at 714-505-3000 to schedule a consultation and learn more about how we can help you.
Brown & Charbonneau, LLP represents individuals as well as large and small companies in cases involving all forms of alter ego claims and shareholder responsibility for corporate debts and wrongdoing. If you are involved in an alter ego claim or would like to learn about your rights and how to protect your interests, we can provide you with the information you need.