Corporate Entity and Limited Liability Flashcards
What is Limited Liability?
The law permits the incorporation of a business for the very purpose of enabling its proprietors to escape personal liability, but that privilege is not without limits (i.e. piercing the corporate veil)
When will the Court pierce the corporate veil?
The court will disregard the corporate forms or pierce the corporate veil whenever necessary to prevent fraud or to achieve equity; where a shareholder is using the corporation for personal ends.
How do you maintain the legal corporate existence (keep it whole)?
Maintain honesty, faithfully–follow the rules and keep your records straight with a paper trail to prove it, then the shareholder is safe.
What is “Enterprise Liability”?
Where individual entities are jointly held liable because they are shared in an enterprise.
What is the test for Piercing the Corporate Veil?
The Van Dorn Test: two requirements,
(1) shared control or unity of interest and ownership
- - there must be such unity of interest and ownership that the separate personalities of the corporation and the individual (or other corporation) no longer exists (see factors), AND
(2) Circumstances must be such that adherence to the fiction of separate corporate existence would sanction a fraud or promote injustice.
What are factors in determining unity of interest and ownership?
- Failure to maintain adequate corporate records or to comply with corporate formalities
- Commingling of funds or assets
- Undercapitalization
- One corporation treating the assets of another corporation as its own
What constitutes “promoting injustice”?
Some elements of unfairness; something akin to fraud or deception or the existence of a compelling public interest must be present in order to disregard the corporate fiction; bad debts aren’t enough for injustice.
What is the “Corporate Fiction”?
That the corporation is an individual entity; that you can’t reach the individual shareholders, only the corporate entity.
What is the “Alter Ego Theory”?
Where there has been an abuse of corporate privilege (unity of interest and ownership) resulting in the equitable owner of a corporation being held liable for the actions of the corporations. (Think parent-subsidiary).
What are factors in identifying an “Alter Ego”?
- Commingling of funds and other assets of the two entities
- the holding out by one entity that is liable for the debts of the other
- Identical equitable ownership in the two entities
- Use of the same offices and employees
- Use of one as a mere shell or conduit for the affairs of the other
Parent and subsidiary: Piercing the Corporate Veil
Even if the pierce the corporate veil for the parent company, you can’t then go deeper and pierce into the other subsidiaries.
Corporations and Limited Partners
Limited Partners were not liable to creditors of the limited partnership simply because they were officers, directors, or shareholders of the corporate general partner.
- However, if a Limited Partner takes an an active role in the partnership, he loses his limited status; legal fiction of the general partner acting through its board and officers rather than the limited partner acting.
- Limited Partnerships must have a general partner with unlimited liability and a corporation as the general partner works.
What “test” is used to determine if a subsidiary is an alter ego or mere instrumentality of the parent company?
Totality of Circumstances; this includes:
- Shared common directs or business departments
- Consolidated financial statements and tax returns
- Adequately capitalized subsidiary
