The internet is an amazing part of our lives, but it has created a simplification of some situations that should be handled delicately. One is in the area of incorporation. More than a few sites now offer to incorporate businesses for a few of a couple hundred dollars plus state fees. A customer pays the fee, goes through the checklist of questions and ultimately receives a corporate book with some blank forms in it. The problem, of course, is the person has no idea what to do with the book or how to run the entity. When the business is subsequently sued, this can lead to disaster when the corporate protection is pierced through the claim of alter ego.
Alter ego is a theory used to penetrate the protection provided by a corporation to its shareholders. An attorney will claim that the corporation is the alter ego of its shareholders. Obviously, this claim is typically made when there are only a few shareholders, to wit, most small businesses. If the court agrees, the corporate protection is set aside and each shareholder becomes jointly liable for all the debts of the business. Obviously, this represents a disaster for most small businesses.
In general, courts apply a two-part test when alter ego is alleged. The court will set aside the corporate shield against personal liability if it finds first that there is a unity of interest between the corporation and the shareholders, then the degree of injustice if the corporate protection remains in place and, finally, the fraudulent intent of the shareholders. This represents a general approach, but the test differs from state to state and then federally as well. Make sure to get legal advice on the situation in your specific case.
At its root, alter ego is an equitable doctrine. This means that the court is evaluating what is fair given the facts presented to it. If you show up in court with a corporate book with a bunch of blank forms, you are in trouble. This trouble only grows when the evidence shows things such as your commingling personal finances with corporate finances and failure to comply with the formalities of a corporation.
If you are experienced in running a corporation, then choosing to use a cheap online service make sense in many cases. If this is your first venture into the business world, it does not. As more and more businesses use online services, more and more attorneys are starting to allege alter ego to have those corporations set aside. Can you really risk that?
Incorporate in California with SanDiegoBusinessLawFirm.com