Alter Ego Liability in CA
When a corporation is established between shareholders, there is an understanding that the corporation is viewed as a separate legal entity with its own assets and liabilities. This protects the shareholders from being personally responsible for the debts of the corporation. There are certain situations where this “corporate veil” can be penetrated and the shareholders become responsible for the debt. An example would be lazy accounting practices, if the owners were trying to defraud the creditors, or would promote injustice. Alter Ego Liability is a strategy that creditors, the Plaintiff, will legally use to collect the funds they are owed. It does not protect every creditor, but it is available to diminish instances where corporations think they can hide behind the veil in order to get out of debt..
Consider that the definition of alter ego translates to “other self.” So when the plaintiff is claiming Alter Ego Liability, the corporation is to be considered an extension of the personal interests of the shareholders. If this can be proven, then the courts may find it fair to hold the shareholders liable for the corporation’s debts. To move forward with the case, the Plaintiff must be able to prove there is a unity between the interest of the shareholders and the corporation and that it would be deemed unfair (or unreasonable) to only hold the corporation accountable for the debt.
Some instances of unity between interests and ownership would be:
- Setting up multiple corporations with the same owners.
- Co-mingling, which is when personal assets and corporate assets are not separated.
- The same staff or office location is used for multiple corporations.
- Inability to account for the corporate assets.
- Inability or under capitalizing the corporation – which is the process for putting a market value to the corporation which would assure that sufficient assets would be available to meet the corporation’s debts.
- Not meeting standard corporate formalities such as noting the minutes of a meeting, improperly issuing stock in the corporation, or conducting regular shareholder meetings.
The Alter Ego Doctrine is not always useful as the shareholders simply may not have the assets to satisfy the debts. This strategy is used in order to prove that the owners’ assets are in fact the corporation’s assets and thus can be fairly used to pay off its creditors.
Always consult with an experienced business lawyer in order to see if you can recoup debts that are owed by a corporation. Consider as more time passes, the company can use it to hide their assets or develop an alternative plan to avoid paying.
