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June 21, 2022

Alter Ego Doctrine and its Significance in Corporate Law

By: Harsh Arora, Esq.

When a court finds that a corporation lacks a separate legal identity from its shareholders, the doctrine of alter-ego comes into play. A distinct identity shields shareholders from being personally liable for the corporation’s debt obligations. When a corporation is abused, the courts step in to pierce the corporate veil and make shareholders personally accountable for the corporation’s obligations.

Businesses that structure  themselves as limited liability companies or corporations generally do so to benefit from the advantages of personal liability separation, but if they fail to comply with other business formalities, Florida courts can take significant action.

The alter ego doctrine is an equitable one that forbids piercing the corporate veil as a cause of action. [1] Creditors cannot pierce the corporate veil unless the corporation is found liable. Courts will determine whether the business entity and its owners have a separate existence.

The applicability of alter ego doctrine is limited to: (1) when a subsidiary is directly controlled by a parent corporation, and (2) when shareholders use a corporation’s existence for personal gain to escape personal liability. [2]

The Florida Supreme Court developed a test that recognized that “improper conduct” would also be required to pierce the corporate veil. [3] When (1) the corporation is a “mere instrumentality” or alter ego of the defendant, and (2) the corporation is formed or operated for inappropriate reasons, the corporate veil can be pierced. In addition to “improper conduct,” plaintiff must prove that improper use caused the injury. [4]

Cases following  Dania Jai-Alai Palace, Inc., better clarify the essentials of the alter ego doctrine in Florida. A list of 15 factors relevant to determining whether a corporation qualifies as a mere instrumentality was given in Hilton Oil Transp. v. Oil Transp. Co. [5] Some include the lack of formalities such as issuing stock, electing directors, or keeping corporate records, insufficient capitalization, overlap in ownership, using corporate funds for personal use, common office space, address and phone numbers of corporate entities, business discretion portrayed by alleged dominating companies, whether the corporation in question deals closely with the dominating corporation, whether corporations are independent cost centers, and the existence of fraud, wrongdoing or injustice to third parties. [6]

Under Florida law, improper conduct happens when the corporation was formed to defraud creditors or was subsequently abused to do so. Even if the corporation was formed for legal purposes, it does not exclude the application of the alter ego doctrine if improper conduct occurred throughout the corporation’s existence. [7]

All in all, Florida law requires corporations to be able to satisfy their responsibilities, prevent shareholder dominance, maintain enough capitalization, use their corporate existence for legitimate reasons, not mask illegal activities, and avoid commingling  funds.

Takeaway

Legal compliance should remain at the top of a corporation’s priority list. By maintaining all records and legal documents up to date, shareholders  can avoid having the Florida courts pierce the corporate veil. Consultation with legal counsel is critical when questions arise around personal liability, which involves navigating a risky situation. An experienced attorney can help shareholders through a claim of piercing the corporate veil, and keep them  updated with all legal requirements, and take steps for risk prevention.

Kelley Kronenberg Can Help

Harsh Arora, Esq. is a Partner and Business Unit Leader at Kelley Kronenberg, where he heads the firm’s Business Law Practice Group. Harsh assists owners and high-level executives in resolving disputes and preventing problems that threaten the existence of their businesses.

Clients generally do not have to go through the pain of litigation on the contracts that are drafted by Harsh where all obligations and legal formalities are met. In addition, few lawyers have a blended practice with experience in handling both Business Litigation and Transactions, which provides clients an opportunity to receive  well-rounded preventative counseling. That is one of the many reasons why Harsh can act as an outside General Counsel for smaller to midsized companies and local counsel for larger companies that want a strong foothold in Florida. Harsh is licensed to practice law in Florida and New York. Click here to learn more about Harsh. https://www.kelleykronenberg.com/florida-business-law/

For more information on how Kelley Kronenberg can help you, contact Harsh Arora, Esq. at (800) 436-1424 or harora@kklaw.com.


Harsh Arora, Esq. is Partner and Business Unit Leader at Kelley Kronenberg, where he heads the Business Law Practice. Harsh concentrates in the areas of business litigation, including dispute resolution through arbitrations and mediations, and he continues to assist clients in structuring and restructuring of complex transactional matters.

Contact Harsh Arora at:
Phone: (800) 393-0179
Email: harora@kklaw.com

 

 

DISCLAIMER: This article is provided as a courtesy and is intended for the general information of the matters discussed above and should not be relied upon as legal advice. Neither Kelley Kronenberg nor its individual attorneys or staff are responsible for errors, omissions, and/or typographical errors – always seek competent legal counsel.

 

[1]. Turner Murphy v. Spec. Construct, 659 So.2d 1242 (Fla. Dist. Ct. App. 1995)

[2]. Molenda v. Hoechst Celanese Corp., 60 F.Supp.2d 1294, 1300 (S.D. Fla. 1999).

[3]. Dania Jai-Alai Palace, Inc. v. Sykes, 450 So.2d 1114 (Fla. 1984).

[4]. See Houri v. Boaziz, 196 So.3d 383 (Fla. 3rd Dist. Ct. App. 2016).

[5]. Hilton Oil Transp. v. Oil Transp. Co., S.A., 659 So.2d 1141, 1151-52 (Fla. 3rd Dist. Ct. App. 1995).

[6]. Id.

[7]. See Harrell v. Accurate Orthotics & Prosthetics, Inc., 529 So.2d 358, 359 (Fla. 2nd Dist. Ct. App. 1988).