Veil Piercing and Alter Ego Doctrine: How an Entity's Veil Can be Pierced
1. Alter Ego Theory
"Alter ego theory" allows debt collection from all of the property of a business's "alter ego". It occurs when an owner or debtor and the business are so intermixed that their affairs are not readily separable. Alter ego theory focuses on the relationship between the business and its owner.
2. Veil Piercing Factors
- Where the LLC engaged in fraudulent or wrongful behavior
- If the LLC failed to follow corporate formalities
- The LLC was inadequately capitalized
- The business cannot operate on its own
- The LLC is governed by one person's expenses
Similar Equitable Remedies Available to Creditors
State and federal statutes govern fraudulent conveyances. The owner or debtor may not transfer assets for less than adequate consideration if the owner is left unable to pay their liabilities.
A majority of states have adopted the Uniform Fraudulent Conveyance Act (UFCA), The Uniform Fraudulent Transfer Act (UFTA) or the Uniform Voidable Transfers Act (UVTA). In Wyoming, W.S. 34-24-201 through 212 controls the definition of fraudulent transfer and creditor's remedies.
Fraudulent conveyances and preferences include:
- Actual fraudulent conveyance, which is to transfer property with the intent to hinder, delay or defraud. Actual fraud may be proven with "badges of fraud" which is an old English term which means engaging in illegal activity or concealment of assets. An example is where owner of the company disposes of his property with the intent or effect of placing it outside the reach of his creditors. Fraudulent conveyance may include (s) gift to a friend or family member (b) transfer to a trust or (c) sale of an asset for less than equivalent value.
- Constructive fraudulent conveyance is transfer without reasonably equivalent value and debtor is insolvent, which means the debtor or owner cannot pay its bills as they become due. Fraudulent conveyance may not be obvious and may include (a) corporate restructuring (b) guaranteeing a debt of a subsidiary (c) taking a security interest and (d) loan modification among other scenarios.
"Piercing the entity's veil" refers to a court putting aside the asset protection of a limited liability company or corporation to reach shareholders or directors. The doctrine also applies between two or more businesses. Courts generally pierce that protection or "veil" to avoid fraud or inequitable conduct.
The use of a LLC is not a guarantee of personal asset protection. Whether the real property is held by an LLC or corporation the individual may be sued personally when the entity and person are "alter egos" of one another. Alter egos connote legally distinct entities which are so intermixed that their affairs and assets are not readily separable.
If you would like to consult regarding your LLC assets, to make sure they are properly transferred and properly distinguished from your personal assets, please call The Law Offices of Gayla K. Austin - 307.200.1914.