Piercing the corporate veil essay sample

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The alter ego theory

One of the primary reason for forming a limited liability company or corporation is to shield individual officers or shareholders from liability. These limited liability companies and corporation are separate legal entities which are organized and have rights to do business in their own right (Lam 2015).

For this reason, these entities have liabilities and legal rights distinction from tier officers or stockholders. Consequently, the individual shareholders or officers are usually not personally liable for the action and debts of the Limited Liability Company or corporation simply by being shareholders or directors of such entities. However, this separate legal right could give reasons to some unscrupulous shareholders and officers to practice injustices in the entities (Lam 2015). For this reason, the alter ego theory is an important doctrine that attempts to prevent such circumstances. The alter ego theory is a doctrine used by courts to disregard the corporate status of officers, a group or shareholders, and directors of a corporation in reference to their limited liability so that they may be held personally liable for their actions when they act unjustly or fraudulently.

A corporation or limited company is considered an alter ego of its officers, directors, or stockholders when it is used for fraudulent or unjust activities for which they want immunity from individual liability (Lam 2015). A parent corporation or limited company could also be an alter ego of a subsidiary corporation or limited company if it directs and controls its activities so that it will have limited liability for its wrongful acts. The alter ego doctrine could also be referred to as the instrumentality rule because the limited company or the corporation becomes an instrument for personal advantage of its parent limited company, corporation, directors, officers, or stakeholders. When courts apply the doctrine, the courts are said to pierce the corporate veil (Rudorfer, 2006). The courts do not apply the alter ego doctrine to other business forms, such as partnerships because partners do not have the same form or limited liability as limited company or corporate officers, stockholders, and directors (Rudorfer, 2006).

However, the owners of a limited liability company may structure their business in a manner similar to that or a corporation so that managers and members are protected from personal liability for debts of the Limited Liability Company. The undercapitalization theory for piercing the corporate veilAccording to Vandekerckhove (2007), the presence of undercapitalization in a corporation or a limited company weighs heavily in favor of piercing the corporate veil. The primary basis of the undercapitalization theory is whether the stockholders created a financially responsible limited company or corporation in the first place. The notion of undercapitalization refers to the insufficiency of capital contributions by stockholders to the limited company or corporation (Vandekerckhove, 2007). In this case, inadequate capitalization means capitalization that is very small in relation to the nature of the business or the limited company or corporation and the risks the business possibly entails (Vandekerckhove, 2007). An adequate capitalized …

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