Avoid the Alter Ego Theory in Undercapitalization

In one case, a court pierced the veil of limited liability and held the owner of a corporation personally liable for his corporation's debt, which amounted to over $100,000. The court applied both piercing of the veil theories. It found that the corporation in whose name the debt existed:

• never held a corporate meeting and kept no corporate records
• owned no assets at all (except one checking account) and instead used without any written agreements or formal arrangement assets owned by a second corporation
• used its only asset, the checking account, to pay the owner's salary in the second corporation
• paid personal expenses of the owner, including his golf dues and the cost of landscaping his yard, without establishing that these were in any way business expenses.

The court also pierced the veil in the second corporation, which was owned by the same individual. The end result was that the individual owner and the two corporations, which he controlled, were all held personally liable for a significant debt only in the name of one corporation. The court found that the second corporation:

• also never held corporate meetings and kept no corporate records
• owned vehicles that carried the name and logo of the first corporation
• owned a vehicle which was used by the owner as his personal vehicle, once again, without any written agreement or formal authorization.

This case presents a classic example of co-mingling of assets, a failure to follow formalities in operating the business, and an inadequate capitalization due to the lack of formally authorized and documented arrangements between the owner and the two corporations. All of this could have been avoided. The owner's mistakes cost him $100,000!