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How To Avoid Alter Ego Liability

Sep 18, 2020

I have a company. Why am I being sued as an individual?

You have probably heard of the term “alter ego” to refer to a person with two separate identities—for example, Superman and Clark Kent. These two individuals may appear to be different, but they are one and the same. Business law recognizes this concept and will impose liability on the owners of a corporation or LLC that do not lawfully separate themselves from their businesses so consider speaking to a San Jose litigation lawyer.

Protect Yourself From Alter Ego Liability

Business law asserts that if owners want to take advantage of the liability protections and benefits of incorporation, they have to abide by corporate principles and maintain separation between their corporate and personal affairs. However, this is not always the case, and many actions can indicate that a corporation is actually an alter ego.

Some of these include:

  • Mingling personal and corporate funds
  • The owner uses corporate accounts as their personal funds to pay personal debts
  • Owner assumes corporate debts by paying with their own funds

You must take many actions overtime to ensure that your corporation and its personal liability are respected by any court that reviews it. There is not one simple thing you can do but be proactive in limiting personal liability. It’s kind of like personal health; you have to keep doing many things right over time.

Here are a few essential tips to help you avoid alter ego liability:

  • Make sure that the corporation is formed with the secretary of state.
  • Make sure that the corporation’s contracts are signed in the corporate name, with its name as the party, and the individual’s signing as President of XYZ, Inc
  • Make sure the corporate funds are not mixed with personal funds to avoid your company from unfair competition.
  • Keep good financial statements and corporate records of annual meetings and have them signed.
    • This means that you should have at least annual financial statements for your business.
    • Your meetings should cover your business’s key aspects, such as revenue, expenses, new developments, products,and services.
    • If you need some guidance on what to include, look at some annual reports of public companies and do a modified version of that.
  • Have agreements with founders, shareholders, and all parties involved in the business.
    • They must be in writing. They must also be fair to all parties; your corporation should not give highly favorable terms to founders or officers, etc.
    • If a contract is with one shareholder, then the non-affected shareholders should approve it.
  • Have written employment agreements and other contracts.
    • These agreements should specify all compensation and benefits offered and clearly disclaim any benefits or compensation not offered.

Contact Nick Heimlich Law Today

Our experienced business lawyers can advise you on how to ensure that you are not held personally liable for corporate debts and address many other legal issues your business may face. 

Call Today To Schedule Your Appointment

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