There are several advantages to doing business as a corporation. One advantage is that corporate shareholders are not personally responsible for the actions of the corporation. This means that shareholders are distinct and separate from the corporations they control. Therefore, if the corporation does not pay a debt, the corporation itself is responsible for repayment, and not the owners or shareholders.
However, using a corporation does not offer a complete shield from liability for corporate actions. If a shareholder uses a corporation as its ‘alter ego’ then the corporation may not be considered distinct and separate from the shareholder. Protection from corporate debts and liabilities is not available to a shareholder using the corporation as its ‘alter ego’.
Determining whether a corporation is an ‘alter ego’ of a shareholder depends on the facts and circumstances of the situation. When determining alter ego status, a court will determine if the shareholder has abused the corporate form of doing business.
The following factors are important in determining the ‘alter ego’ status of a shareholder:
- the corporation is not following legal formalities (for example, no annual shareholder meetings, no regular board of directors meetings, not electing officers or directors, or not following formal stock transfer requirements)
- there is commingling of shareholder personal funds/bank accounts with corporate funds/bank accounts
- the shareholder is treating the corporate assets as their own personal assets
- the corporation does not have adequate financing or is underfunded
Holding a corporation liable for the owner’s personal debts can also occur. An example is when an owner buys or leases an asset such as a vehicle or real estate through the corporation and then fails to pay the lease payments or loan payments for the asset. In this case paying the loan back could be the responsibility of the corporation. The test for determining this is the same as for piercing the corporate veil by alter ego.
For more information about corporations: https://legalvaughan.com/business-law/