Alter Ego Doctrine and Piercing the Corporate Veil

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Alter Ego Doctrine and Piercing the Corporate Veil

Studies show that up to 85% of independently owned business owners are not aware of the compliance requirements mandated by the state in which they do business. If you are in this vast majority and someone obtains a judgment against your business, there is some risk that your personal assets—your home, your cars, your boat—could be seized to satisfy that judgment. The best protection against this is to ensure your compliance with your state’s regulations on maintaining a “corporate veil”—the legal separation that creates personal liability protection for business owners.

To maintain a corporate veil, you must observe certain corporate formalities, no matter the size of your company. These include the keeping of records on:

  • Corporate bylaws — the company must adopt a set of bylaws outlining how the business is to be operated and setting the dates and times for regular shareholders meetings and Board of Directors meetings.       Bylaws also outline the actions and responsibilities of the corporation’s officers, Board of Directors and shareholders.
  • Corporate bank accounts — bank accounts must be set up in the name of the corporation and kept separately than those of the individual owner.
  • Stock ledger — the company must maintain a stock ledger that details the issuance of stock certificates and the amount of stock owned by each shareholder.
  • Corporate meeting minutes — regular meetings must be held and a written record of those meetings must be kept.
  • Business conducted in the corporate name — all transactions and agreements must be done in the name of the corporate entity, not the individual owner, shareholders or officers.

Failure to maintain compliance can result in what is called “piercing the corporate veil,” which is a legal finding by the court that in fact a business does not exist separate from its owner — in other words, the business has been operating as an “alter ego” instead of as a separate and distinct business entity.

Under the alter ego doctrine, the legal liability protection of the entity can be set aside by a court if it is found that the company was used as a mere shell by persons or other entities for a wrongful or inequitable purpose. If a court finds that the owners of a corporation or LLC used that entity as an extension of themselves or misappropriated corporate assets to enrich themselves, the alter ego doctrine may apply.

When you are facing any type of business litigation, you need an experienced Arizona trial attorney to obtain the best possible result. Contact Williams Mestaz, L.L.P., at (602) 256-9400 to speak with us about your case.

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