ALTER EGO THEORY - Piercing the Corporate Veil
Contact Neufeld Legal PC for your incorporation legal work at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com
The Alter Ego Theory is a legal doctrine used in certain instances by courts to disregard the separateness of a corporation and its owners (shareholders, or in some cases, a parent corporation), thereby "piercing the corporate veil" and holding the owners personally liable for the corporation's debts or wrongdoings. This doctrine is an exception to the fundamental principle of limited liability, which normally shields owners from a corporation's obligations.
Courts generally require a plaintiff to prove two main elements, though the specific tests can vary by jurisdiction:
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Unity of Interest and Ownership: The plaintiff must show such a unity of interest and ownership between the corporation and the individual or other entity that their separate personalities no longer exist. In essence, the corporation is completely dominated and controlled by the owner.
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Inequitable Result/Injustice: The plaintiff must demonstrate that adhering to the fiction of the corporation's separate existence would either:
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Sanction a fraud or wrongdoing.
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Promote a manifest injustice or an inequitable result for the plaintiff.
To establish the "unity of interest and ownership" element, courts examine several factors that indicate the corporate form is being abused or improperly maintained. These factors are not a checklist, and no single factor is usually determinative; rather, the court looks at the totality of the circumstances.
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Commingling of Assets: Blurring the line between personal and corporate finances. Examples: Using corporate funds for personal expenses, or using personal bank accounts to pay corporate debts.
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Failure to Observe Corporate Formalities: Disregard for the procedures that establish a corporation's separate existence. Examples: Not holding regular board or shareholder meetings, failing to keep adequate corporate records (like minutes), or not issuing stock.
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Inadequate Capitalization: The corporation was never provided with sufficient funds to meet its foreseeable debts or to operate its business.
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Treating Assets as Personal: An owner or parent company uses the corporation's property or resources as their own.
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Same Office/Employees: The individual, or parent company, and the corporation share the same physical location, telephone number, employees, etc., without clear demarcation.
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No Independent Business: The corporation conducts no business of its own, serving merely as a "shell" or "conduit" for the owner's personal business.
The Alter Ego Theory serves as a vital tool to prevent individuals or controlling entities from using the corporate structure as a shield to perpetrate fraud or escape legitimate liability.
If your business is seeking experienced professional legal representation with respect to incorporating a new corporation or dealing with the corporate legalities impacting your company, contact us at 403-400-4092 [Alberta], 905-616-8864 [Ontario] or via email at Chris@NeufeldLegal.com.
