Articles Tagged with alter ego liability

AdobeStock_271469937-300x200In general, shareholders are protected from liability for the debts of the corporation. This is because the corporation is viewed as a separate legal entity with its own assets and liabilities. This “corporate veil” of protection can, however, be pierced in certain situations, and personal liability imposed on the shareholders. Creditors use this legal tactic strategically to be sure they can access funds for what they are owed. The experienced California business attorneys at the Structure Law Group can help advise creditors on how to effectively pierce the corporate veil in order to satisfy the debts they are owed.

Elements of Alter Ego Liability

In order to pierce the corporate veil, the plaintiff must prove “alter ego liability.” Alter ego literally translates to “other self.” In alter ego liability, the corporation has been treated as an extension of shareholders’ personal interests, so the courts find it fair to hold shareholders liable for the corporation’s debts, as well. Plaintiffs in California must establish: (1) that there is a unity of ownership and interest between the owners (or shareholders) and the corporation, and (2) that it would be unfair to only hold the corporation accountable for its debts in order to establish alter ego liability.

One of the primary benefits of incorporating your business and complying with corporate governance laws is that a corporation provides personal liability protections for its owners from the debts and liabilities of the corporation. These protections exist because a corporation is viewed as an entity that exists separate from its owners and this creates a “corporate veil” which is intended to protect the shareholders from personal liability. However, there are some circumstances in which an injured party may hold shareholders personally responsible for the debts or actions of the corporation. This is commonly referred to as either “alter ego liability” or “piercing the corporate veil.”

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Generally speaking, when a party sues a corporation, that party seeks money from the corporation and not from shareholders as individuals. In some situations, however, owners may simply be using a corporation as an “alter ego” for themselves and they do not actually treat the corporation as a separate legal entity. In such cases, a party suing the corporation may pierce the corporate veil and try to hold the owners personally liable as well. While successful alter ego liability is rare, it does occur and all corporate owners should take steps to avoid it whenever possible.

Signs of “Alter Ego” Corporations