Sole proprietorships and partnerships are not viewed as separate legal entities from their owners. Instead, their are seen as having the same identity for the purposes of taxes and liability. One of the main reasons why some sole proprietors and partners decide to incorporate their businesses is to create two distinct legal entities. This means that the debts and liabilities of the corporation are the corporation’s alone and the owners will generally not be held liable for them. There are some circumstances, however, in which owners may find themselves liable for corporate debts and one such situation is called “alter ego liability.”
A Corporation as an Alter Ego
You have probably heard the term “alter ego” to refer to a person that has two separate identities – for example, Clark Kent and Superman. These two individuals appear to be different but, in reality, they are one and the same. Business law recognizes this concept in that it will impose liability on the owners of a corporation or LLC that do not separate themselves from their businesses in the way the law intended.
Business laws assert that if owners want to avail themselves of the benefits and liability protections of incorporation, they must abide by corporate principles and maintain separation between their personal and corporate affairs. This is not always the case, however, and many acts may indicate that a corporation is actually an alter ego. Some of these include:
- Mingling corporate and personal funds
- Owners use corporate accounts as their personal funds to pay personal debts
- Owners assume corporate debts by paying with their own funds
- One corporation owns a nearly identical corporation, and they often use the same resources, location, and staff
- Failing to properly capitalize a corporation
- Forming a corporation for the sole purpose of transferring personal debts
- Not complying with corporate requirements, such as stock issuance or holding meetings
If a court finds that a corporation is merely an alter ego, it may allow a party to “pierce the corporate veil” and hold owners personally responsible for any liabilities.
Contact a Houston Business Attorney Today
An experienced business lawyer can advise you on how to ensure that you are not personally liable for corporate debts and can address many other legal issues your business may face. Please call The Weisblatt Law Firm LLC at 713-666-1981 for assistance today.