Alter Ego Liability

By IncNow | Published October 7, 2013

Alter ego liability is a legal term used offensively by a creditor to a company who is attempting to pursue the assets of the owner-operator of a business. It is a claim that the manner in which the company has been operating is without recognition of a distinction between the owner and the business: the business is just an extension of the individual or his “alter ego.” This is a legal sword to piece the protective layer between the business and the person to allow the business creditor to extend his claim from not only the business assets, but also to the owner’s personal assets. For example, when few corporate formalities are not followed, such as documenting transactions, keeping separate records and accounts, the injured party can claim that the company was just an extension of its owner and that the line between the person and the business was so blurred as to make the creditor believe he was dealing with the individual not operating as a business entity. This is an easier case to make in the corporate context. In the context of an LLC, there are fewer required formalities and therefore fewer “rules” that need to be followed. Nevertheless, it is a good idea to keep contracts in the proper name of the business, whether it is an LLC or a corporation. Delaware is one state that does not favor this method of attack. It is a very difficult claim for a creditor to make in Delaware. However, other states, with less developed laws and less sophisticated judges may be more prone to entertain this offensive attack on the company and its owner, resulting in a “thinner” bullet proof jacket in states other than Delaware. Avoiding alter ego liability it another reason to incorporate in Delaware, to get the “thicker” bullet proof jacket.

When deciding where to form your company, consider that Delaware has advantages over your home state that may benefit you. Go