Is your corporate entity really protecting you?

Under Alabama law a corporate entity can be subjected to a claim of alter ego. A claim of alter ego attacks the validity of the corporate entity and seeks to reach the individuals behind the corporate veil.

What this means is that a corporate entity, whether it be an LLC, a corporation, or a limited partnership, must be properly formed and operated or the organizers, members, shareholders or limited partners. If not, individuals may be subjecting themselves to liability. Traditionally piercing a corporate entity in Alabama has been difficult but recent cases such as Hill v. Fairfield Nursing & Rehabilitation, 134 So.3d 396, 412 (Ala. 2013) illustrate that while the claim of alter ego or piercing the corporate veil is difficult there are an increasing number of cases where a plaintiff pursuing that claim has been successful at reaching individuals behind the corporate entity.

What this means for an individual, member, limited partner, or shareholder of a corporate entity is that attention to detail must be maintained and the corporate structure properly operated or that entity may be disregarded by the courts.

A review of how the corporate entity is operated and whether it is properly maintaining its corporate shield includes the following:

  1. If you are an LLC do you have valid operating agreement?
  2. Are minutes kept of regular meetings of the corporation?
  3. Do you maintain a separate corporate bank account which does not have personal funds or funds from other entities co-mingled in the bank account?
  4. If you are a corporation have stock certificates been properly issued to shareholders of the corporation?
  5. Has the corporate entity been properly capitalized?
  6. Is the corporate entity so controlled by another entity or individuals so as to make it the instrumentality or alter ego of the controlling entity/person? If so, has that control been misused.

Alabama has typically recognized three extraordinary circumstances under which it may be appropriate to pierce the corporate veil:

  1. Where the corporation possesses grossly inadequate capital;
  2. Where the corporation is conceived or operated for fraudulent purpose; or
  3. When the corporation is operated as the alter ego of an individual or entity who exerts excessive control over the same.

See Gibson v. JRM, Inc., 812 So.2d 1269 (Ala. Civ. App. 2001); see also, Messick v. Mooring, 514 So.2d 892, 893 (Ala. 1987).

We have been involved with defending alter ego claims and can assist you in a review of your corporate structure and operation so as to minimize the possibility that you corporate entity will be set aside exposing you to personal liability.

We would welcome the opportunity of addressing your questions on this issue and our initial consultation is always at no charge.

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