Corporation’s Owners Can Be Liable Under Alter Ego Doctrine
Can I Hold Corporation’s Owners Personally Responsible For Corporate Debt through Alter Ego or “Piercing the Corporate Veil”?
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. The trial attorneys at Brown & Charbonneau, LLP 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. Before the alter ego doctrine can be applied, the two below conditions must exist:
- It must appear that the corporation is not only influenced and governed by that person, but that there is such a unity of interest and ownership that the individuality, or separateness, of such person and the corporation has ceased; and
- The facts are such that an adherence to the fiction of the separate existence of the corporation would, under the particular circumstances, sanction a 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 corp so it has sufficient assets to meet corporate debts;
• Representations by an individual that he is personally responsible for corp’s debts; and
• Failing to follow corporate formalities like meetings, minutes, etc.
The purpose of the alter ego doctrine is not to protect every unsatisfied creditor, but rather to give him protection when some wrongful 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.
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.
Getting Legal Help
Brown & Charbonneau, LLP represents individuals as well as large and small companies in cases involving all forms of contractual disputes. If you are involved in a contract dispute, or would like to learn about your rights and how to protect your business, we can provide you with the information you need. Contact us or call today at 714-406-4397 to schedule a consultation and learn more about how we can help you.
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