A Brief Look At Business Disputes and Alter Ego Theory.

Real Estate Law

One concept frequently used in the business litigation context is that of “alter ego.” As a business owner, the reason for incorporating (or forming a limited liability company (“LLC”)) is to reap the benefits that corporate status gives; to wit, insulation from personal liability for corporate debts or contracts.

In law, corporations and LLC’s are legal entities that are separate from individuals who own and manage them. As a result, the debts and obligations a corporation or LLC incur while doing business are the responsibility of the entity and not the individual.

The Alter Ego Doctrine.

While the idea of not being responsible for your corporation or LLC’s debts and contractual obligations is a major benefit of incorporation, this veil of protection is not unassailable. There are times in litigation when a court may “pierce the veil” and hold a company’s individual owners or managers personally liable for the company’s activities.

One doctrine that can be used to pierce the corporate veil is that of “alter ego.” The doctrine of alter ego can come into play when individual owners or shareholders of a corporation disregard the separateness of the corporate entity and use the corporation for their own personal benefit.

If an individual uses the corporation (or LLC) to advance his own personal transactions and dealings to the point where it can be difficult to impossible to separate the company from the individual, then it may be argued that the individual is merely using the corporation as his/her “alter ego.”  Just one example of this is the comingling of funds.  If an owner uses the money the business makes to pay his mortgage, or credit cards or other personal expenses (as opposed to business expenses), this can lead to a finding of alter ego.

Other common factors that may lead to a finding of alter ego include:

  • Disregard of the formalities
  • Undercapitalization
  • Actions of fraud or injustice

Of course, before a court will dispense with the protections that incorporation normally provides and hold an individual personally liable for the acts and obligations of his/her company, it must be established that the individuality or separateness between the person and the corporation does not exist  (or never existed), and that, given the facts of the particular case, recognizing the corporate protections would result in injustice or fraud.

The blurring of the lines between an individual and the corporate entity is far more likely with smaller companies and LLCs. This is because many small company owners do not follow the rules when it comes to the legal formalities or comingling.

Business Litigation in Cumming, Georgia.   

The attorneys at the Law Offices of Mark Weinstein, P.C, have experience in all aspects of business litigation. We are based in Cumming, Georgia, but we serve Atlanta and the surrounding counties.  Give us a call at: 770-888-7707. Or you can contact us here.

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