Alter Ego Theory: Legal and Business Issues

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Business Law Assig
Name
Institution

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ALTER EGO THEORY
Legal Issues
The dictionary definition of the term “alter ego” alludes to substitute personality. In the
legal context, alter ego is a doctrine in direct reference to piercing the corporate veil, whereby
shareholders of a company are held individually answerable for the company’s debts, thereby
deeming such company an “alter ego” of its shareholders (Wang, 2013). It is indeed an
exception to the rule set in Salomon v Salomon [1897] AC 22 to the effect that a company
bears a separate and different personality from its members.
The concept of alter ego came about with an intention to provide an equitable remedy
against abuse of the corporate personality. In United Sates v Milwaukee Refrigerator Transit
Co., 142 F. 247, 255 (E. D. Wis 1905) it was stated:
“A corporation will be looked upon as a legal entity as a general rule, and until
sufficient reason to the contrary appears; but when the notion of legal entity is used to
defeat public convenience, justify wrong, protect fraud, or defend crime, the law will
regard the corporation as an association of persons.”
In MFP Eagle Highlands, LLC v Ann Health Network of Ind., LLC, No. 1:07-cv-0424-
DFH-WGH, 2009 WL and in Thomas v Bridges, 120 So.3d 338, 342 (La. App. 2013), the
Courts have paid cognisance to the fact that whilst a person who creates a limited liability
company to evade personal liability is in pursuit of a genuine business goal, one that does so
to narrow down their tax liability is ingenious in their dealings (Miller & Crain, 2011).
Business Issues
There are instances where a corporate entity is established as a subsidiary to another and
the former is an alter ego of the latter. Frederick J. Powell, on Parent and Subsidiary

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Corporations, Liability of a Parent for the Obligations of its Subsidiary, Chicago, Callahan
& Company, 1931, outlined a total of eleven factors to be considered when assessing this
scenario, amongst them being:
i. Whether the latter is in ownership of either all or a substantial stock of the
former.
ii. Whether the latter extends financial support to the former.
iii. Whether the latter is in subscription of the entire capital stock of the former or
is brought about its incorporation.
iv. Whether the former strictly carries on business activities with the latter and/or
whether the former’s assets are entirely pegged on the latter.
v. Whether the governing agents of the latter are autonomous and act in the best
interest of the former.
Read together with the legal issues with regard to the nature of the business carried out by
a corporate entity, the business issues arising demonstrate that it is incumbent upon the
owners/shareholders and the governing arm of the company to take into account all the above
factors when designing the structure of the company for the purpose of efficiency (Clarkson,
Miller & Cross, 2010).
Applications to Personal Envisions in today’s Business Environment
Today’s business atmosphere is fuelled by a desperate need for making profits and this has
been seen to be at the expense of quality services, whereby businesses are more emphatic on
the quantity of products they put out there (Field & Smith, 2014).
Further, today’s economy is unfavourable to the average businessperson. The high cost of
living has warranted the business environment to scheme through its survival by, for