The Alter Ego Theory

So you own your own business. Welcome to the top!inequitable result will occur if the corporation alone is
Whether you're a newcomer to calling the shots or,held responsible.
you have done this before, you dreamed big and haveIn California, courts often consider a list of factors to
taken the first step to exceeding your owndetermine whether Alter Ego liability is appropriate. No
expectations.one factor is controlling or must be present. These
You are watching your costs and, although youfactors are generally laid out in Associated Vendors,
intended to "do it right" from the start, things have fallenInc. v. Oakland Meat Packing Co. (20 Cal.App.2nd 825
behind a bit and honestly, there is a new priority list - it'sand 26 Cal.Rptr. 806 (1962)). When summarizing prior
as simple as that! Mind you, you fully intend to maintaincases, the Associated Vendors' Court identified a
your corporate legal formalities - whatever those are -number of possible factors, the most notable of which
but right now, you're busy and; not only are you busyare:
but, if business fails to be profitable enough, those legal1. Commingling of funds and other assets, failure to
formalities will become immaterial . . . just as will thesegregate funds of the separate entities, and the
business itself. Besides, your corporation provides youunauthorized diversion of corporate funds or assets to
with a shelter known as limited liability. So, you're fine.uses other than corporate uses;
Right?2. Treatment by an individual of the assets of the
Generally speaking, California corporate lawcorporation as his own; Diversion of assets from a
encourages business ventures, risk-taking andcorporation by or to a stockholder or other person or
entrepreneurial activity by limiting the director's, officer'sentity;
and shareholder's liability for corporate actions. In that3. Diregard of legal formalities, including the failure to
respect, the law actually views the corporation as amaintain adequate corportae/accounting records and
separate legal "person" so its debts, for example, areor minutes;
personal to it, just as yours are to you.4. Domination and control of the corporation by its
However, this protection is not absolute and so thingsequitable owners;
can begin to get tricky!5. Use of the same office or business location, the
Under certain circumstances, courts will disregard theemployment of the same employees and/or attorney;
corporate entity (including LLC's) and 'pierce the6. Failure to adequately capitalize a corporation;
corporate veil'. The result - individual shareholders,7. Use of a corporation as a mere shell, instrumentality
directors, officers or members can be held liable foror conduit for another person or entity, use of the
corporate actions. Suddenly, personal financialcorporate entity to procure labor, services or
resources and, assets such as your home, can be inmerchandise for another person or entity; and/or
jeopardy.8. Failure to maintain arm's length relationships among
So, under what circumstances may a court piercerelated entities.
your corporate veil or, as it is also known, find that youThe factors listed above involve factual allegations
have utilized the corporation as an 'alter ego'? Goodwhich are subject to enormous potential dispute.
question!Because of this, 'corporate veil' cases can come with
First, you should know that the Alter Ego theory is onesignificant costs!
of the most commonly alleged equity-based principalsTherefore, if you own a corporate entity or are
around and that the common law doctrine of 'piercingconsidering establishing one, help protect yourself, and
the corporate veil' is recognized in all 50 states.your future, by maintaining your corporate legal
To successfully prosecute such a claim, the plaintiffrequirements!
must prove that (i) there is a unity of interest betweenAn ounce of prevention could be worth a pound of
the corporation and the potential debtor, such that theycure!
have no practical separate existence, and (ii) an