Do you own a business as a corporation or an LLC, and think you’re insulated from personal liability? Think again. There are numerous ways that a shareholder of a corporation or a member in an LLC can be held personally liable for the acts of the entity. One, in particular, is the alter ego doctrine. Ordinarily, a corporation is regarded as a legal entity separate and distinct from its stockholders, officers and directors. Under the alter ego doctrine, however, if a corporation is used to perpetuate a fraud or accomplish some other wrongful purpose, a court may disregard the corporate entity and hold the individual who controls the corporation liable for the corporation’s acts. This is known as “piercing the corporate veil.”
More and more frequently, lawyers are asserting the alter ego doctrine in shareholder and other corporate-related litigation. Understanding the possible exposure will help you protect yourself.
While a court will look at all of the circumstances regarding corporate ownership and control when deciding whether to pierce the corporate veil, there are some important steps you can take to prevent a court from holding you responsible for the acts of your corporation or LLC. Among them are:
* Keep the corporation adequately capitalized, e.g., be certain the corporation has funds sufficient to cover its obligations;
* Keep the corporation’s funds and assets separate from and not commingled with your own;
* Maintain corporate formalities, e.g., have corporate meetings, maintain minutes, pay business taxes or fees as appropriate;
* Keep the corporation’s records separate from your own;
* Do not use the corporation as a conduit for personal business;
* Do not hold yourself out as personally liable for the corporation’s debts; and
* If you own or control multiple corporations, utilize different boards of directors, different officers, different employees and different office space.
Unfortunately, there is no absolute protection from an alter ego claim. Following these steps, however, will greatly reduce the likelihood that you will be held liable for the acts of your corporation or LLC.