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“Piercing the Veil” and “Alter Ego” Doctrines

Protection against personal liability is one of the primary benefits of various business forms such as corporations, LLCs and limited partnerships. These personal liability protection are not, however, absolute. If a company is a “sham” or is created to wrongfully avoid responsibility, its owners may be personally liable for its obligations or any harm caused. In addition, ignoring formal requirements can result in the loss of limited liability protections.

In limited instances, the law permits challenges to the asset protections of corporations and other limited liability entities and hold the owners responsible for debts or damages. Similarly, a court might find that the company doesn’t really operate as an independent entity and is really the “alter ego” of another company or person and will hold the controlling entity responsible for the other company’s legal obligations.

The law presumes that the limited liability protections apply and are valid, but may hold owners personally liable based upon an analysis of several factors, including:

Whether the company is adequately capitalized
Whether the company co-mingled assets
Whether the company engaged in fraudulent behavior
Whether the company failed to follow formalities (such as meetings, votes, resolutions etc.)
Whether a single person or small group controls the decisions of the company

Where these factors lead to the conclusion that the corporate form should not protect the companies or individuals behind it, the court can “pierce the corporate veil” and hold those behind it responsible for the corporations misconduct.