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March 24, 2021
University of Nevada, Reno – Ozmen Center for Entrepreneurship Blog

Alter Ego: When Individuals May Be Liable for Corporate Debts

By James Newman, Co-Author

Republished with permission, originally appeared online March 24, 2021, on the University of Nevada, Reno – Ozmen Center for Entrepreneurship Blog

Nevada encourages business ventures and entrepreneurism by allowing individuals to form corporations as a shield against personal liability. Generally, individuals are considered separate from the corporations they control. So, if a corporation fails to pay a debt, the corporation itself is liable, and not its individual owners or operators.

But the individual protection offered by a corporation is not unlimited. Under the doctrine of “alter ego” (also known as “piercing the corporate veil”), individuals may be liable for the actions of their corporations in certain circumstances. The general question is whether the individual—usually a shareholder, officer, or director—abused the corporate form such that it would be unfair to shield that individual from personal liability. While there are no rigid requirements for the alter ego doctrine, considerations include whether (a) the individual commingled his or her personal funds with the corporation, (b) the corporation was underfunded, (c) the individual treated the corporation’s funds as his or her own, or (d) corporate formalities were observed.

Example: Joe Badman started a web-design company in the form of a limited liability company (LLC) in which he was the sole member and manager. Having procured funding for the LLC from Big Bank, Badman uses those funds to pay off his student loans and purchase a “company RV,” which he uses for a long-desired road trip to all 62 National Parks. The LLC never holds meetings and, unsurprisingly, is unable to pay back its loan to Big Bank. In these circumstances, Badman could be held personally responsible for the LLC’s debt to Big Bank under the Alter Ego doctrine.

Conversely, corporations may also be held liable for an individual’s debts, which is known as “reverse piercing.” The considerations are largely the same as alter ego and turn on whether the individual has abused the corporate form so that the individual and corporation’s assets are difficult to distinguish.

In sum, while Nevada protects the separation between individuals and corporations for the purpose of avoiding personal liability, that protection is not endless and can be pierced where the corporate form is abused.

Jim Newman and Frank LaForge are attorneys in the Reno office of Holland & Hart LLP

This publication is designed to provide general information on pertinent legal topics. The statements made are provided for educational purposes only. They do not constitute legal or financial advice nor do they necessarily reflect the views of Holland & Hart LLP or any of its attorneys other than the author(s). This publication is not intended to create an attorney-client relationship between you and Holland & Hart LLP. Substantive changes in the law subsequent to the date of this publication might affect the analysis or commentary. Similarly, the analysis may differ depending on the jurisdiction or circumstances. If you have specific questions as to the application of the law to your activities, you should seek the advice of your legal counsel.


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