Alter Ego Doctrine Definition

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Alter Ego Doctrine

Alter Ego Doctrine Definition

Alter Ego Doctrine Definition-corporation used by an individual to conduct personal business. It’s illegal. In alter ego scenario, individuals will be held liable to the corporation. See also piercing the corporate veil.

Personal liability can happen when:

  • corporate debt is knowingly incurred when the company is already insolvent;
  • required annual shareholders or board of directors meetings are not held, or other Corporate-Formalities are not observed;
  • corporate records, especially minutes of directors meetings, are not properly or adequately maintained
  • shareholders remove unreasonable amounts of funds from the corporation, endangering its financial stability;
  • there is a pattern of consistent non-payment of dividends, or payment of excessive dividends;
  • there is a general commingling of corporate activity and/or funds and those of the person or persons who control the corporation;
  • there is a failure to maintain separate offices, the company has little or no other business and is only a facade for the activities of the dominant shareholder who is in fact, the corporate "alter ego."
The Alter Ego Doctrine is intended to prevent individuals or other corporations from misusing the corporate laws by the device of a sham corporate entity formed for the purpose of committing fraud or other misdeeds. Alter-ego liability is an extreme remedy, sparingly used or invoked, and always the exception to the rule. However, when the remedy is employed by the court as a last resort to prevent injustice, it can be disastrous for the shareholders of a corporation which expected limited liability.

It is indeed possible to breach the wall of personal liability provided by incorporation, and for your asset safety you should know how such exceptions can occur. If you don't protect your assets, know that your competitors will. Certain acts of directors and officers may be grounds for a company creditor to ask a court to "pierce the corporate veil". For example, if the corporation cannot pay a creditor's proven debt or a court judgment claim, the individuals who own and manage the corporation can be held personally responsible for company obligations, even though they have given no previous personal guarantees.

In order to maintain personal limited liability, it is essential these described actions be avoided. Courts in recent years have found ever expanding reasons to hold directors, officials and shareholders personally liable for corporate responsibilities. Among other activities courts have found that may impose personal liability are improper corporate guarantees of loans or contracts benefitting an officer, timing of the sale of a controlling interest in the company for self-benefit, profiting from inside information, transactions with other businesses which may constitute conflicts of interest, unreasonable loans to company officials, and extension of unwarranted credit.

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