Avoiding 'Alter Ego' Status

A business owner was referred to Matthew C. Mullhofer by his long time client. The gentleman wanted to know how to eliminate various business risks by forming different entities in order to control the risk beyond insurance coverage. Creditors like to defeat this type of corporate planning by using a legal theory called “alter ego” which means that they can reach all assets that are controlled by a business owner, in order to satisfy their judgments, so he wanted to know how to avoid this and keep all the entities separate.

Matthew C. Mullhofer explained that the Federal and State Courts have provided a way to avoid having the activities of one entity merged into a sister entity by means of the “alter ego” theory. If a creditor failed to prove the “alter ego” they would not have jurisdiction over the sister entity that has the deep pocket even when they may have personal jurisdiction over the other entity.

In order for a Corporation of LLC to refrain from being considered the alter ego of another entity, Matthew C. Mullhofer explained, it must maintain these corporate formalities:

· It must maintain separate books and accounting records;

· Maintain separate bank accounts;

· File separate tax returns;

· It must be sufficiently capitalized when it enters into business;

· Loans or other capital transactions between entities should work together at an arm’s length transaction

Matthew C. Mullhofer helped his new client set up his businesses in a legal procedure. This in turn helped the client successfully maintain his business entities by following proper corporate formalities.

Call Matthew C. Mullhofer today at (714) 827-9955 to discuss your business ownership questions.