Alter Ego

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Alter Ego

A doctrine used by the courts to ignore the corporate status of a group of stockholders, officers, and directors of a corporation in reference to their limited liability so that they may be held personally liable for their actions when they have acted fraudulently or unjustly or when to refuse to do so would deprive an innocent victim of redress for an injury caused by them.

A corporation is considered the alter ego of its stockholders, directors, or officers when it is used merely for the transaction of their personal business for which they want Immunity from individual liability. A parent corporation is the alter ego of a subsidiary corporation if it controls and directs its activities so that it will have limited liability for its wrongful acts.

The alter ego doctrine is also known as the instrumentality rule because the corporation becomes an instrument for the personal advantage of its parent corporation, stockholders, directors, or officers. When a court applies it, the court is said to pierce the corporate veil.

Courts have not traditionally applied the alter ego doctrine to other business forms, such as partnerships and limited partnerships, because partners generally do not enjoy the same form of limited liability as corporate stockholders, officers, and directors. By comparison, however, owners of limited liability companies may structure their business in a manner similar to a corporation so that members and managers are shielded from personal liability for the debts of the Limited Liability Company (LLC). Several courts have determined that the alter ego doctrine may also apply to LLCs. For instance, in Kaycee Land & Livestock v. Flahive, 46 P.3d 323 (Wyo. 2002), the Wyoming Supreme Court held that the equitable doctrine of piercing the veil was an available remedy under the Wyoming Limited Liability Company Act.


Corporations; Immunity; Liability.

alter ego

n. a corporation, organization or other entity set up to provide a legal shield for the person actually controlling the operation. Proving that such an organization is a cover or alter ego for the real defendant breaks down that protection, but it can be difficult to prove complete control by an individual. In the case of corporations, proving one is an alter ego is one way of "piercing the corporate veil." In a lawsuit complaint, it might be stated (pleaded) that "the Hotshot Corporation was the alter ego of Joseph Snakeoil."

References in periodicals archive ?
Turning to authorities in this area dealing specifically with issues of tax jurisdiction, an older case which may be considered an "alter ego" decision is Minnesota Tribune Co.
The reasoning of the court, however, seems to reflect a legitimate concern with questions of both alter ego and agency in that the holding company effectively utilized its control of the board of directors of the lower-tier entity to achieve its own purposes.
No agency relationship was assumed to exist between the sister corporations, so the analysis focused on alter ego principles.
In the opinion, the advisory opinion described the alter ego approach and implied that the same analysis might apply to a unitary approach to jurisdiction:
The advisory opinion held that the subsidiary was subject to New York State sales tax on the basis of its alter ego relationship with the parent, stating:
In Harfred Operating Corp.,(151) a New York State advisory opinion applied an alter ego approach in holding that two foreign corporations operating in New Jersey were also subject to New York sales and use tax, on account of the New York presence of their parent holding corporation and sister corporation (which actively conducted business in New York).
The real basis for the advisory opinion holding in this matter, however, appears to be the motive of management in setting up the separate New Jersey corporations "as a means to make sales in New Jersey to New York residents in order to avoid collecting New York tax."(154) Moreover, the operating companies were held out to the public as one entity.(155) Assuming the advisory opinion findings are adequate, as a matter of equity it may have been appropriate to apply the alter ego doctrine to subject the New Jersey corporations to New York tax.
Director, Division of Taxation,(157) also illustrate how the alter ego doctrine has been used by a state to subject foreign corporations to tax on the basis of the relationship of those corporations to others doing business in the state.
But the result in this case is clearly proper only if the subsidiary is viewed as an alter ego of the parent.
Only recently, however, has it been applied to issues of tax jurisdiction.(166) Whatever the ultimate fate of the "unitary" approach to attributional nexus, it currently stands as a third avenue of advance (alongside the agency and alter ego doctrines) for state tax collectors to attempt to assert their authority over foreign corporations.
This theory differs from the agency and alter ego approaches in the sense that the out-of-state entities subjected to tax need not either (a) have directed that the instate entities undertake action on their behalf within the taxing state, or (b) have effectively merged their identities with the in-state entities.(169) Under unitary jurisdictional theory, an out-of-state entity could presumably be subjected to tax in a state with which it has no direct connection nor even an indirect connection, save for its role in the overall "unitary-business." Such a concept at first blush seems suspect in light of the constitutional limitations that have been applied to more conventional jurisdictional approaches.