What is an “alter ego”? The expression is Latin and translates to “second me”, “another me” or “another me”. In the federal tax context, the alter-ego doctrine comes into play, where the IRS believes that in the eyes of the law, a person or organization should be considered “one and the same” as the taxpayer, allowing the IRS to collect the taxpayer`s tax liability or the taxpayer`s alter ego. The alter-ego doctrine, on the other hand, treats an entity as if it were the taxpayer for the purposes of collecting the tax. [1] It is not applied according to ownership; On the contrary, it potentially applies to the entire property of the alter ego. “Alter ego” literally means a person`s secondary or alternative self, much like Dr. Jekyll and Mr. Hyde, but perhaps not always as strong. In a legal situation in which a company is involved, an alter ego refers to a company that has become the servant of the shareholders or officials who run the company rather than being managed as an independent entity. When a lawsuit is filed against a business or LLC, the owners of the business are protected from personal liability. They are legally protected by the corporate veil that stands between them and the entity they control. This protection is called limited liability.
This is what prevents a business owner from losing their home and other personal property to satisfy a lawsuit. A corporate identity protects its shareholders and those who operate the company from personal liability for debt obligations or other financial liabilities, provided that the company operates as a company and complies with all legal requirements regarding good operational conduct – compliance with meetings of the board of directors and shareholders, and compliance with all record-keeping and filing obligations. A company is considered the alter ego of its shareholders, directors or officers if it is used only for the transaction of their personal business for which they want to be exempt from individual liability. A parent company is the alter ego of a subsidiary if it controls its activities and directs them in such a way that it has limited liability for its unlawful acts. In the eyes of the law, a corporation and a limited liability company (LLC) are treated separately from their owners. As separate entities (rather than alter-egos), they can enter into contracts, own assets, do business, and sue – in addition to being sued. Recent Supreme Court decisions have even affirmed that companies have the right to freedom of expression. If you`ve ever used your business for a personal expense, you`ve treated your business like an alter ego and opened up to personal responsibility. Prevent potential litigation from affecting your business by keeping your business or LLC separate from itself and your shareholders. Under the alter-ego doctrine, the IRS can seize property held on behalf of a third party if the third party owns the property as the taxpayer`s alter ego. In other words, the law may allow the IRS to collect property or rights in property held by a taxpayer`s alter ego unit (such as a trust, corporation, or LLC) to collect the taxpayer`s tax liability. If you need help figuring out how to navigate alter ego disputes, please contact your lawyer or Flynn Associates hackler.
Let`s say you buy shares of Microsoft. It is ok. You are now a co-owner of the business. However, if Microsoft is sued and found guilty, a judge cannot order you, as a shareholder, to pay the legal damages. They are protected by limited liability. Doctrine is based on justice. Thus, the courts have allowed their application “whenever necessary to avoid injustice” or when public order requires its application. For example, the courts have allowed the IRS to invoke the alter-ego doctrine when a company has been used to “circumvent a public duty, such as paying taxes,” or when a taxpayer “has built units of paper to avoid taxing or paying taxes when those entities are without economic substance.” Under these circumstances, the federal courts allowed the IRS to penetrate the corporate veil to raise taxes. Traditionally, courts have not applied the alter ego doctrine to other forms of business, such as partnerships and limited partnerships, because partners generally do not enjoy the same form of limited liability as shareholders, officers and directors of corporations. However, in comparison, owners of limited liability companies can structure their business in the same way as a corporation, so that members and managers are protected from personal liability for the debts of the limited liability company (LLC). Several courts have ruled that the alter-ego doctrine can also apply to LLCs.
For example, in Kaycee Land & Livestock v. Flahive, 46 pp.3d 323 (Wyo. 2002), the Wyoming Supreme Court ruled that the correct doctrine of veil piercing was an available remedy under the Wyoming Limited Liability Company Act. When the doctrine of alter ego applies, the shareholders of a company are treated as “partners” and held jointly and severally liable for its debts. (Minnesota Min. & Mfg. Co. v. Superior Court (1988) 206 Cal.App.3d 1025, 1028 (ownership of a single share may be sufficient to establish alter egos` liability)); (Hiehle v. Torrance Millworks, Inc. (1954) 126 Cal.App.2d 624, 630) An active shareholder who influences and governs the company may be held liable as an alter ego. (American Home, Ins.
Co. vs. Travelers Indem. Co. (1981) 122 Cal.App.3d 951, 966.) If you want to pursue an alter-ego case against a company, you need to gather solid evidence to present it in court. On the other hand, if your business is challenged by the alter ego doctrine, you need to show that you have followed the right business protocol and legal standards. In any case, you will need the legal advice and advice of an experienced lawyer. Several courts have ruled that insufficient capitalization in itself is sufficient to find penetration of the corporate veil.
(See Automotriz del Golfo de California S.A. De C.V. v. Resnick (1957) 47 Cal.2d 792, 799; Trust Fund v. Uriarte Clean-Up Serv., Inc. (9th Cir. 1984) 736 F.2d 516, 524; Nilsson, Robbins, et al. v. Louisiana Hydroelec. (9th Cir. 1988) 854 F.2d 1538, 1543-1544 (The president of the company, who owns 30% of the shares of the company, found a different ego due to the undercapitalization of the companies).) If the organizers of a company have not invested any money at all, or if customers reduce an operating company to a mere shell by withdrawing their assets, the violation of the corporate veil is usually maintained.
(Jack Farenbaugh & Son v. Belmont Const., Inc. (1987) 194 Cal.App.3d 1023, 1033-1034.) All of the following factors have been used to determine whether the accusation of alter ego is true: The alter ego arises from the situation in which the company is not its own entity, but simply the alter ego of the owner*. To make a claim against the alter ego under California law, a litigant would have to prove two key elements: On the second point – “an unfair outcome will follow” – in 2000, in Sonora Diamond Corp. v. Superior Court, the court ruled: “The alter-ego doctrine does not protect all dissatisfied creditors of a business, but rather provides protection when the conduct amounts to bad faith, it is unfair for the business owner to hide behind the form of the business. If you are involved in an alter-ego court case, whether as a plaintiff or defendant, rely on the experience, knowledge and resources of the law firm of David H. Schwartz, INC. Attorney David H. Schwartz serves clients in and around San Francisco, including San Jose, Santa Clara, Oakland, San Mateo, and Alameda County. The theory behind the doctrine rests largely on the premise that the taxpayer and the alter ego are so mixed that their financial affairs cannot or should not be separated.
Therefore, its application focuses on the relationship between the taxpayer and the potential alter ego. Alter ego is a legal doctrine in which the court concludes that a company does not have a distinct identity from an individual or a corporate shareholder. The court applies this rule to ignore the corporate status of a group of shareholders, officers and directors of a company with respect to their limited liability. The determination of the alter ego gives the court a reason to penetrate the corporate veil and make individual shareholders personally liable for the company`s debts. In business law, the alter-ego doctrine is often used as a justification for breaking through the corporate veil and assigning personal responsibility to a business owner. This happens when a judge determines that there is not enough separation between the owner and the business entity. In these cases, the company is not a separate entity, but simply the alter ego of the owner. There is no litmus test for determining when the corporate veil is broken; Rather, the outcome depends on the circumstances of the individual case.