Alter Ego Doctrine

Alter Ego Doctrine

The alter ego doctrine is a method of invoking personal liability on a corporation's shareholders or a limited liability company's members. The doctrine can apply when the court finds a lack of distinction between the shareholders and the corporation. For example, the corporation's bank account is paying the sole shareholder's mortgage. If the court discovers a lack of distinction, the court may "pierce the corporate veil" and expose the shareholders to personal liability for corporate debts and other obligations.

Advantages of Limited Liabilities

One of the big advantages of forming a corporation is the protection from personal liability provided to it's shareholders. In fact, the purpose for most individuals forming a corporation is to shield its shareholders from the liabilities. The mere forming a corporation establishes a presumption of the corporation's separate existence, but this presumption can be overcome by a creditor.

There is a great importance on ensuring the shareholders are protected from personally liability. Hence, our business attorneys spend a lot of time working with corporations on their daily operations and compliance. Our Sacramento business attorneys break down the "do's and don'ts" and help establish good practices for doing business. Without these "good practices," a corporation may be susceptible to the alter ego doctrine and have the corporation's veil pierced. If a corporation's veil is pierced, each shareholder may be liable for the corporation's debts and obligations.; consequently, the shareholders lose one of the biggest advantages of forming a corporation.

California Alter Ego Liability Two-Part Test

A California state court will consider two factors when deciding whether the alter ego doctrine will apply and the corporate veil may be pierced.
  • There is such a unity of interest between the corporation and its shareholders that they have no separate personalities; in essence, the shareholders have treated the corporation as their alter ego; and

  • It would promote an injustice to uphold the corporate entity and permit the shareholders to escape personal liability for its obligations.

Federal Alter Ego Liability Three-Part Test

A federal court will consider three factors when determining whether the alter ego doctrine will apply and the corporate veil may be pierced:
  • The amount of respect given to the separate identity of the corporation by its shareholders;

  • The degree of injustice visited on the litigants by recognition of the corporate entity; and

  • The fraudulent intent of the incorporators.

Examples Leading Towards Alter Ego Doctrine

These examples are certainly not an exhaustive list; however, they provide some insight into circumstances that may lead a court to pierce the corporation veil under the alter ego doctrine. There are dozens of already decided legal cases that have created a long list of fact specific scenarios when the alter ego doctrine was used to pierce the corporate veil. Our Sacramento business attorneys understand the necessary steps to ensure proper compliance.
  • Commingling personal and corporate funds and other assets;

  • Issuing stock with out authority;

  • Undercapitalization;

  • Shell corporations;

  • Misrepresentations of ownership, assets, and financial interests;

  • Avoiding creditors by transferring assets to shareholders; and

  • Failure to issue orders in the name of the corporation.

A 2014 Example: Wells Fargo Ban, N.A. v. Weinberg

In Wells Fargo Ban, N.A. v. Weinberg, an attorney thought he could personally avoid a creditor, but was caught under the alter ego theory. Steven J. Weinberg had a corporation called, Steven J. Weinberg, a Professional Law Corporation. The corporation established a business line of credit with Wells Fargo and owed roughly $57,000 after default. Wells Fargo sue both the corporation and Mr. Weinberg. Mr. Weinberg was personally protected from liability until Wells Fargo pursue the alter ego doctrine.
Wells Fargo argued that Mr. Weinberg drained the corporation's assets before dissolving it. Mr. Weinberg then began operating under the name of "Steven J. Weinberg a Trial Lawyer" and continued the same practice at the same location as the previous corporation. Mr. Weinberg had also drafted 200 checks identified as "loan repayments" from the corporation to himself and his wife. The amount of the checks disbursed was $420,982. The court found for Wells Fargo under the alter ego theory stating, "[b]ecause it looks to me that you did a fairly obvious thing. You starved the corporation of revenue, continued your practice, and left, arguably, yourself, and your wife, and Wells Fargo holding the bag." The court also found that "when the corporation needed money, you wrote a check to the corporation and when you needed money, the corporation wrote you back a check."

It was apparent the corporate was a shell. Mr. Weinberg did not produce any corporate minutes, resolutions, or authorizations. Simply put, the corporate formalities were lacking.

Contact Sacramento Business Attorneys

Our business attorneys provide day-to-day guidance on operating a business. We assist with all necessary corporate formalities, including, for example, meeting minutes, resolutions, bylaws, and election of the board of directors. Our Sacramento business attorneys understand corporate formality requirements and can provide very helpful insights to ensure your corporation is in compliance. Contact our law office to schedule an initial consultation.

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Alter Ego
*The information provided in this post does not constitute legal advice or opinion. The information is for guidance purposes only. Individual situations vary and you should contact an attorney for a consultation. This post is considered a solicitation and advertisement. The post does not warrant the outcome of any matter. Sacramento Business Lawyer on the Alter Ego Doctrine.