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Generally a corporation is for most purposes an entity distinct from its individual members or stockholders, who, as natural persons, are merged in the corporate identity and remains unchanged and unaffected in its identity by changes in its individual membership. By the nature of a corporation, its property is vested in the corporation itself, and not the stockholders. The stockholders, as such, do not have the power to represent the corporation or act for it in relation to its ordinary business, nor are they ordinarily liable for the acts and obligations of its ordinary business, nor are they ordinarily personally liable for the acts and obligations of the corporation. In no legal sense, can the business of a corporation be said to be that of its individual stockholders or officers.
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1. |
The doctrine that corporation is a legal entity existing separate and apart from the persons composing it is a legal theory introduced for purposes of convenience and to sub serve the ends of justice. Separate corporate identity is a privilege conferred by law to further important underlying policies, such as the promotion of commerce and industrial growth. The concept cannot, therefore, be extended to a point beyond its reason and policy, and when invoked in support of an end subversive of this policy, will be disregarded by the courts, often referred to as "piercing the corporate veil". The principal of piercing the fiction of the corporate entity is, however, to be applied with great caution, and not precipitately, since there is a presumption of corporate regularity. While corporate entities may be disregarded where they are made the implement for avoiding a clear legislative purpose, they will not be disregarded where those in control have deliberately adopted the corporate form in order to secure its advantages and where no violence to the legislative purpose is done by treating the corporate entity as a separate legal person, it has been held that only duty established courts of law or equity may disregard the legal entity of a corporation, and that an administrative agency has no such power. For further see corporate veil and corporate veil in court of equity.
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1.1 |
Alter ego, the corporate entity is distinct although all or a majority of its stock is owned b a single individual or corporation, or although the corporation is a so-called "family" or "close" corporation or is a professional service corporation. While single or controlling ownership alone does not support a disregarded of the corporate entity, and even in a close corporation, the principal or sole stockholder, permitted by law to play an active role in management, may deal with third parties without incurring personal liability, as long as the separate corporate identity is maintained, the courts have hells where the corporate fiction is merely an alter ego or business conduit of an individual, it may be disregarded. In other words a corporate entity may be disregarded where there is such unity of interest and ownership that the separate personalities of the corporation and the individual no longet exist, and where, if the acts are treated as those of the corporation alone, an inequitable result will follow.
Alter ego doctrine, applies to contractual debts as well as to tort claims.
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1.2 |
Corporate veil broken for whose benefit? Generally, the corporate veil is never pierced for the benefit of corporation or its stockholders, who is suing the corporate veil to defraud. In certain situations, however, the corporate entity will be disregarded to protect the rights of a shareholder, as where it is shown that the individuality and separateness of the corporation and the individual have ended and that it would be unjust to persist in the recognition of a separate entity.
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1.3 |
Corporate veil broken for non-profit. The not-for-profit corporation itself does not bar the application of the equitable remedy of piercing the corporate veil. Such as a suit to recover compensation for improper use of an official name in solicitation campaigns. Certain cases have held the evidence did not justify a disregard of the corporate entity in certain union and religious corporations.
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1.4 |
Factors affecting liability. Generally, each case-involving disregard of the corporate entity must rest upon its special facts. See Corporate veil liability.
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2. |
Capitalization. A corporation's capitalization is a major consideration of courts in deciding whether a legitimate separate corporate entity was maintained. To be sure there is no presumption of fraud, deceit or ill practices on the part of stockholders because a corporation's limited capitalization. Inadequate capitalization in itself is not a badge of fraud, unless capitalization is very small in relation to the nature of the corporation's business and to the risks that the business necessary entails, nor it is, in itself, sufficient to support a disregard of the corporate entity. That a corporation is undercapitalized is one factor in determining the corporate entity issue. Under capitalization cannot be proved merely by showing that the corporation is at present insolvent. If, however, insolvency occurs soon after incorporation, it may be a primary indicator of under capitalization.
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3. |
Fraud, illegality, injustice and the like. The corporate entity is generally disregarded where it is used as a cloak or cover for fraud or illegality, to work an injustice, to defend crime, or to defeat an overriding public policy, or where necessary to achieve equity. Corporate existence as an entity distinct forms its members may be ignored in order to circumvent the fraudulent purpose of the shareholders in its organization or management. See Corporate fraud.
When fraud or deceit is absent, other circumstances must be so strong as to clearly indicate that the corporation and shareholder operated as one.
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4. |
Corporate device to avoid obligations or responsibility. The corporate entity may be disgarded where the corporation exists merely as a device to escape legal obligation. On the other hand, the organization of a corporation for the avowed purpose of avoiding personal responsibility does not in itself constitute fraud justifying the disregard of the corporate entity. It is, in fact, one purpose for incorporating.Where the incorporation is restored to for the purpose of avoiding an existing obligation of the incorporators, the fiction of the separate legal entity will be disregarded. Example, an individual cannot avoid responsibility by assigning a mortgage to a corporation he organized and hereby acqauire priority over a contract lien created while he was the owner of the property.
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5. |
President is an alter ego of the corporation, Check list:
The following facts and circumstances tending to show that corporate president is an alter ego of corporation:
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1. President is govering of all corporate affairs.
2. Presidents assumption of personal liability on obligations.
3. President has power to remove any officer or director.
4. Incomplete organization of corporation.
5. Director's failure to meet regularly.
6. Director's failure to maintain minutes of meetings.
7. President is ownership of majority of corporate stock.
8. Lack of paid in capital.
9. Presidents failure to follow legal procedures incident to govering of corporate affairs.
10. Inadequate capitalization of corporation.
11. President is furnishing of corporate assets.
12. Presidents treatment of corporate assets as his own.
13. President is commingling of corporate assets as his own.
14. Persidents use of corporate office for personal affairs.
15. Presidents use of corporate employees as his own.
16. Presidents use of corporation as conduit for individual business.
17. Presidents use of corporation ro procure goods or service for own self.
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6. |
Incorporation of partnership or the like, business of individual the mere fact that a corporation is organized to take over a business formerly conducted by a firm or individual is not itself sufficient to render it liable for a debt or responsible for an obligation incurred by such firm or individual in conducting such business. The corporation is separate and distinct from its predecessor. There is no liability on the corporation where where an absence of an assumption of the partnership, debts even where the partners are given stock in the corporation for their interest, at least there is no liability where new capital is invested in the corporation by third parties. When the corporation is in fact merely a continuation of the old business under a different name, it is liable for the debts of the preexisting business. At least a presumption arises that the corporation has assumed such debts. This presumptio may, however, be rebutted. The liability of a corporation for the partnership debts is sometimes based upon the theory that a transfer of partnership assets to the corporation is fraudulent as to creditors of the partnership.
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6.1 |
Agreement by corporation to assume debts of partnership or the like, or the business of an individual, may assume the liabilities of said and become liable to their creditors. The assumption may, be either express, or implied from certain circumstances, and proved by an competent evidence which will establish it. In absence of fraud or bad faith, the debts which the corporation assums may be limited. Even under an agreement to assume the debts are postponed to those contracted by the corporation after its organization. In this respect, however, there is authority to contratry.
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7. |
Parent corporations in respect to subsidiary or commonly owned. The subject of the separate corporate entities of subsidiary, affiliated and commonly owned corporations is but an aspect of the broader concept of separate corporate existance vis-à-vis stockholders (be they individuals or corporations).
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7.1 |
The principle, a one man corporation, that fraud is not necessary to hold an individual liable under a contract of his corporation has been extended to a parent-subsidiary relationship. However, as with corporations solely owned or controlled by one or few individuals, corporations solely owned or controlled by other corporations do not, by virtue of such stock ownership alone, lose their identities as distinct legal entities.And just as holding or parent corpotation has a separate corporate existence and is to be treated as a seprate entity, in the absence of circumstances justifying disregard of corporate entity, so too, are subsidiary corporations ordinarily independent of each other.
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7.2 |
There are cases in which the separateness of a corporate entity has been disregarded and a parent corporation held liable for the act of its subsidiary because the subsidiary's affairs had been so controlled as to render it merely an instrument or agent of a parent corporation for the acts of its subsidiary. See corporate liability.
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8. |
Corporation as Preson or Citizen. Persons are divided by the law into persons natural and persons artificial. See the rights to act as a corporation.
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9. |
Corporate charter. It is said that a charter is an instrument or authority from the sovereign power bestowing rights or privileges and that, therefore with regard to the corporations, the term is correctly used in its limited sense only with reference to special incorporatios by act of the legislature. In the case of a corporation organized under a general statue, however, the papers of incorporation , whether known as the articles, application, or certificate, are frequently referred to as the corporation's charter.
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9.1 |
The term "corporate charter" has come to mean the right and privilege of being a corporation, granted by the state generally through an act of the legislature or articles of incorporation.
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9.2 |
A corporation's certificate of incorporation is "prima facia" evidence of the facts stated therein.
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9.3 |
Conditions to charter, Rules of construction, Constractural nature and Corporation and stockholders, Amendment or Repeal, Effects of amendments, Rights of stockholders, Corporate contracts, Acceptance of amendment, Amendments to right of sockholders, Form of amendment of articles or certificates of incorporation. See Corporate rules and amendments.
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