Alter ego doctrine
A veil-piercing theory where the entity is treated as the owner's alter ego due to disregard of formalities.
Definition
Alter ego doctrine is a veil-piercing theory under which courts treat the LLC as the owner alter ego, disregarding limited liability. Triggers: commingling funds, undercapitalization, ignored formalities, treating LLC assets as personal.
Context
Maintaining clean separation reduces alter ego risk substantially.
Example
A single-member LLC owner uses the LLC bank account for personal expenses, never executes Operating Agreement, and treats LLC property as personal. A creditor sues and argues alter ego.
Common pitfalls
- Defenses: separate accounts, Operating Agreement, formal records, adequate capitalization.
- Especially relevant for single-member LLCs.