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Alter Ego: How Can I Be Personally Liable When I Have a Corporation?

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Arietta Law Complimentary Evaluation

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I routinely get asked about whether an individual can be liable for a corporate debt.

Clients usually form corporations to insulate themselves from personal liability.

Sometimes the corporate status is abused. The doctrine of alter ego allows a party to pierce the corporate veil and go after individual corporate officials, holding them responsible. To establish alter ego, a party must show that two conditions are met: first, there must be such a unity of interest and ownership between the corporation and its equitable owner that the separate personalities of the corporation and the shareholder do not in reality exist. Second, there must be an inequitable result if the acts in question are treated as those of the corporation alone. On the first prong courts have identified multiple factors to help determine whether the requisite unity of interest exits --- commingled funds? Corporate formalities followed? Adequate capitalization? Minutes and corporate records kept? Any one factor is not determinative.

Was the corporation at issue treated as a separate entity?

On the second prong, the inquiry is whether there was some conduct amounting to bad faith that makes it inequitable for the corporate owner to hide behind the corporate form. Difficulty in enforcing a judgment or collecting a debt does not satisfy this standard otherwise the limited liability protections of the corporate form would be of little value. Note that alter ego is a limited doctrine and is viewed as more of the exception than the rule. It is fact sensitive. It is expensive and time consuming for parties to prove. In the author’s experience, it is often invoked but difficult to establish.