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

Clients routinely ask whether the owner/shareholder of a corporation can be liable for a corporate debt.  I am not talking about liability resulting from personal guarantees but  the alter ego theory of recovery.

Clients usually form corporations to insulate themselves from personal liability BUT SOMETIMES THAT FAILS

The doctrine of alter ego allows a party to pierce the corporate veil and go after individual corporate officials, holding them responsible.  Sometimes the corporate status is abused.  In the world of civil litigation, the alter ego doctrine is often invoked, but it is difficult to establish.   The idea is whether the corporate form would work an injustice to a third person; it is the exception, not the rule. 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 were kept?  Any one factor is not determinative.   Common equitable ownership and shared directors and officers between the corporation and its alleged alter ego are not alone sufficient to warrant a formal alter ego finding, but those factors can be significant when coupled with other facts suggesting a lack of separateness.   Evidence that the corporate is used as a mere shell, instrumentality, or conduit for a single venture, or for the business of an individual or another corporation, will weigh heavily in the determination of alter ego. 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:  a creditor would always pursue the assets of shareholders if a corporate debtor could not or would not pay, rendering the shareholders guarantors of all corporate debt.  The corporate form will not recognized if to do so would "sanction a fraud or promote injustice" (See Webber v. Inland Empire Investments, Inc., 74 Cal. Ap. 4th 884, 900 (1999). Note that alter ego is a limited doctrine and is very costly to prove.   In my experience it is often invoked but difficult to establish.  Call David A. Arietta, Esq. at (925) 472-8000 if you have questions about alter ego and your options.