Legal Question in Business Law in California

Re: Alter Ego

I think you have misunderstood the concept of alter ego.

A corporation (including an LLC) and its owners are treated as legally separate entities -- thus shielding the owners from liability for the corporation's debts -- but only if they respect the legal requirements of corporate status. If they disregard these requirements then a court may decide that, in reality, the owners and the business weren't separate after all and that the corporation's creditors should be able to collect from the owners.

The most pertinent of these requirements is that the corporation and its owners maintain separate finances. It's OK for the owners to receive dividends from the company if they are calculated in a way that protects the company's health, and it is OK for the owners to receive a salary if they also work for the corporation. But if the owners use the corporation's assets as if they were personal property -- for example, by paying their own bills with company money, or by using company assets as if they were personal property -- then they are asking for trouble.

By incorporating, an entity tells the world that it is financially separate from its owners. If this separateness does not actually exists, then the claim is false and the incorporation becomes a fraud on the public in general and on the corporation's creditors in particular. Courts will not let such a fraud prevent creditors from reaching the owners' assets.

Re: Alter Ego

If you failed to properly run the LLC in compliance with the corporate rules, you could become personally liable for claims on an 'alter ego' theory. If such claims are being made against you, get counsel immediately.

Re: Alter Ego

First, I agree with the preceding two answers by Mr. Hoffman and Mr. Nelson, except both answers tend to suggest that corporations and LLCs are the same thing, or operate under the same set of laws. LLCs and corporations are both artificial entities, but one is not a subset of the other; they are different and operate under somewhat overlapping, but by no means the same, rules and principles.

Second, it helps to understand what "alter ego" means - it is a legal Latin phrase literally meaning "other I" or "other self." In practice, it refers to the business entity as being the owner's other self; a business run without regard for the distinct nature of the business. Your LLC is not you, and you are not your LLC. If you run it as such, you will lose the benefits of protection from personal liability.

Next, to try to answer your question. I believe the owner or owners of an LLC can be held liable for its debts in ANY of the following situations IF the owner(s) treated the LLC as their alter ego:

(1) contract written before dissolution, mismanagement occurred before dissolution;

(2) contract written after dissolution, mismanagement occurred before dissolution;

(3) contract written before dissolution, mismanagement occurred after dissolution; or

(4) contract written after dissolution, mismanagement occurred after dissolution.

Finally, I would say that owners of LLCs are particularly vulnerable to mismanagement connected with dissolution, because in addition to the "alter ego" theory of personal liability, there are other legal theories upon which they can be held liable for the LLC's debts and other obligations. In general, the owners and other insiders of an LLC (or a corporation) cannot take assets in any way, shape or form for their own benefit before non-insider creditors and potential creditors are paid or provided for. This means, for example, that an owner of a dissolving LLC (or corporation) cannot pay himself a salary, take home left-over merchandise, drive off in the truck he contributed to the business as part of its capital, and so on, until everyone else is paid or taken care of, 100 cents on the dollar. This may also mean the owner cannot "roll over" the goodwill of a failed LLC into a successor LLC also owned by him by recycling the name, location and customer list of the old business; however, I am not sure of this, and if the question arose I would need to research it carefully.