Monday, April 28, 2014



The corporate veil separates the assets and liabilities of the company from the assets and liabilities of its owners; thus protecting owners from business risk.  In order to pierce the corporate veil, and attach assets of individual owners to satisfy the debts and obligations of the business, a court must apply a legal doctrine known as "alter ego” theory, which establishes that the business and the individual cannot be separated.  Each state has a different standard for defining alter ego doctrine.  In most cases, it is defined in the precedent of case law, such as in California where presently 28 separate factors can be used to pierce the corporate veil.  In a few cases, it is defined in statute.  Nevada defines the alter ego doctrine by statute; Wyoming uses a combination of statutory reference and case law.
Under Nevada statute (NRS 78.747) alter ego can only be applied when all three of the following factors are present:  a) The corporation is influenced and governed by the individual; b) There is such a unity of interest and ownership that the corporation and the individual are inseparable from one another, and; c)  To keep the corporation separate from the individual would be to promote fraud or manifest injustice.  This is the “best” corporate veil protection available, because it relies on the standard of “fraud or manifest injustice”, which requires evidence of ill intent to proceed with veil piercing.

Wyoming code (17-16-622) states that “unless otherwise provided in the articles of incorporation, a shareholder of a corporation is not personally liable for the acts or debts of the corporation EXCEPT THAT HE MAY BECOME PERSONALLY LIABLE BY REASON OF HIS OWN ACTS OR CONDUCT.”  This definition leaves open to the interpretation of the court as to what constitutes the type of acts or conduct that may create personal liability.  Traditionally, the doctrine of legal separation of the entity from the individual revolves around the basic tenant that “if the individual doesn’t treat the corporation like a separate entity, neither will the court.”  This general principle can be applied broadly by the court, to include numerous “acts” by the individual that fall far short of Nevada’s “fraud or manifest injustice” standard, including such things as commingling funds, failure to maintain corporate formalities, undercapitalization, failure to maintain arm’s length transactions, etc.  Thus, Nevada has a clear and distinct advantage over Wyoming regarding the strength of the corporate veil.  This advantage applies to LLCs as well, for this and other reasons.

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