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Contract & Business

What is An Alter Ego Theory And How To Be Protected From It

By December 5, 2022No Comments

To understand what the Alter Ego theory is (aka piercing the corporate veil), we first need to understand that a company (whether it is a partnership, corporation or limited liability) is a “juridical person.” What this means is that a company is (at least under the law) a different person than its owners. It has its own juridical “persona.”

In certain circumstances though, this legal fiction or “veil” can be undone if the owners of the juridical shell engage in certain inappropriate acts. The “veil” can be pierced, and the company shell can be considered an “alter ego” of the owner—a different version of the owner himself. This can happen even when the owner of an entity is another entity. “In determining whether the corporate veil should be pierced, the relationship between the parent corporation and its subsidiary must be examined.” Ocala Breeders’ Sales Co. v. Hialeah, Inc., 735 So. 2d 542, 543 (Fla. 3d DCA 1999). In order to be liable for the acts of its subsidiary, the parent corporation “must exercise control to the extent the subsidiary manifests no separate corporate interests of its own and functions solely to achieve the purposes of the dominant corporation.” Enic, PLC v. F.F. S. & Co., 870 So. 2d 888, 891 (Fla. 5th DCA 2004). That is, “[a] parent corporation will not be held liable for the actions of its subsidiary unless the subsidiary is deemed to be a mere instrumentality of the parent.” Am. Int’l Grp., Inc. v. Cornerstone Buss., Inc., 872 So. 2d 333, 337 (Fla. 2d DCA 2004).

One of the signs that one entity does not really is total domination. The fourth district court of appeals have held that “[t]otal domination, if established by competent evidence, will justify piercing a corporate veil.” Church of Scientology v. Blackman, 446 So. 2d 190, 192 (Fla. 4th DCA 1984).

Piercing the corporate veil has been found to be warranted, for example, when both parent and subsidiary were controlled by the same person, subsidiary operated out of the same facilities as parent, the subsidiary’s contracts were performed by an employee of parent, parent owned all of subsidiary’s stocks, subsidiary had never been capitalized, all funds earned by subsidiary were deposited into parent’s bank account, subsidiary’s financial obligations were paid by checks drawn on the parent’s bank account, and subsidiary had no bank accounts. See Ocala Breeders’ Sales, 735 So. 2d at 543; see also 17315 Collins Ave., LLC v. Fortune Dev. Sales Corp., 34 So. 3d 166, 168 (Fla. 3d DCA 2010) (parent and subsidiary were alter egos where subsidiary was owner, developer, and operating entity for condominium development and the parent owned membership interests of the subsidiary and was managing member, but did not conduct any operations, have any employees or payroll, or have any bank accounts); cf. Salkin v. Chira (In re Chira), 353 B.R. 693, 736 (Bankr. S.D. Fla. 2006) (parent corporation liable for the subsidiary’s debt where the subsidiary “had no bank account, no assets, no capital, and no employees”).

As you can see in Florida’s precedent, one of the very first things owners must do in order to be protected from a potential plaintiff trying to establish an alter ego claim is separation. It is important that the company owner (or owner himself, if a person) always keep separate accounts, assets, employees, or offices, when possible. The more you commingle the two, the more likely that an entity will expose itself to be pierced.

In cases where the owner of an entity is an actual person, it is very important that that owner do not use the company as his/her personal purse. When the owner does not have a salary, a separate account for expenses and simply runs the entity as its personal fiefdom, he is exposing the entity to an alter ego claim. While alter ego claims are difficult to prove, company owners should still be careful. The last thing an owner wants is to be faced with a plaintiff digging into his finances through the litigation discovery process.

For more information about our business litigation practice email attorney Eduardo A. Maura at Eduardo@ayalalawpa.com or call 305-570-2208.

You can also schedule your case evaluation online at: https://www.lawayala.com/consultation/

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