This week’s question:
I am thinking about going into business for myself and I need some legal help. It seems to me that a corporation is the only way to go to keep creditors away just in case my new business is not successful. Isn’t it true that only my corporation would be responsible for corporate debts?
/s/Kevin K.
Almaden Valley
Dear Kevin—
The short answer to you question, Kevin, is a definite maybe. Maybe yes and maybe no. Let me explain.
Let us assume that your corporation was properly set up in terms of articles of incorporation, bylaws, and all the rest. Let us further assume that the corporation incurred a business debt. This does not automatically assume that only your corporation is responsible for the business debt.
A creditor could possibly argue in court that you are the “alter ego” of your corporate entity. If that argument were upheld in court, you could possibly be personally responsible for the business debt, along with your corporation.
These principles were discussed in a recent case arising out of Los Angeles County Superior Court. The case is entitled Misik v. D’Arco and it was decided July 27, 2011 by the Second Appellate District.
In the Misik case, Mr. Misik loaned Mr. D’Arco’s company, Sayrahan Group, LLC $150,000. A default occurred and a judgment was entered after trial in favor of Mr. Misik for the $150,000. However, the initial judgment was only against Mr. D’Arco’s corporation and not against him personally.
An appeal followed by Mr. Misik and the Court of Appeal found that even after a trial, personal liability under the “alter ego” theory of liability could be imposed against Mr. D’Arco, even without a finding of actual fraud. A finding of “injustice” in adhering to the fiction of the separate existence of the corporation may be sufficient.
The Court of Appeal discussed the various conditions under which the corporate entity may be disregarded and personal liability imposed for business debts.
One factor is whether there is a sufficient unity of interest and ownership between the corporation and the individual or organization controlling it that the separate personalities of the individual and the corporation no longer exist.
And a second factor is whether treating the acts as those of the corporation alone will sanction a fraud, promote injustice, or cause an inequitable result.
Almaden Times readers can read this case for themselves by going to their favor search engine and entering Misik v. D’Arco and hitting “go.” Several ways to access the case should be on your screen in a heartbeat.
/s/Donald J. DeVries
Almaden Valley
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