It is common for entrepreneurs to start more than one business venture simultaneously. Often, these separate ventures will have similar names, share office space, tools, equipment or employees, or be involved in the same industry or field. While one owner may have multiple business ventures under Indiana law, the relationship between or among these ventures can raise concerns about liabilities being asserted against both entities, rather than just one entity. The theory is that one entity is merely the “alter ego” of the other entity, and that the corporate structure of each separate entity should be ignored, allowing a claimant to sue both entities for the bad acts of just one of the entities. The theory by which liability flows from one entity to another is often referred to as “Affiliate Liability,” where two entities are too closely affiliated to escape the conclusion that they are two companies acting as one single entity. This concept is also called the Corporate Instrumentality Doctrine and is stated as a principle of corporate law permitting a court to disregard the corporate existence of a subsidiary corporation when the subsidiary is operated solely for the benefit of the parent corporation. Under Corporate Instrumentality Doctrine, the parent company controls and directs the activities of the subsidiary while asserting the shield of limited liability. When the Corporate Instrumentality Doctrine is applied to a sham organization designed bring about injustice, the courts will pierce the corporate veil. These concepts are not limited to parent-subsidiary corporate structures. Rather, the courts will examine the relationship among companies to determine the true purpose of each entity.
The Indiana Supreme Court and Indiana Court of Appeals have stated that the legal fiction of a corporation may be disregarded where one corporation is so organized and controlled and its affairs so conducted that it is a mere instrumentality or adjunct of another corporation. Indiana courts will refuse to recognize corporations as separate entities where the facts establish that multiple corporations are acting as the same entity. In essence, the courts will allow the “corporate veil” to be pierced, when the corporate form is so ignored, controlled or manipulated that one entity is merely the instrumentality of another and that the misuse of the corporate form would constitute a fraud or promote injustice.
In determining whether to allow the piercing of the corporate veil, the courts will make a fact-sensitive inquiry. Rarely is the piercing of the corporate veil permitted or disallowed as a matter of law. However, in one case, the courts held that, as a matter of law, a corporate officer could not pierce the corporate veil of a subsidiary, because the officer served on the board of directors of both entities and, therefore, was not defrauded or unfairly treated. The Court of Appeals stated it this way: “While we have expressed willingness to use our equitable power to disregard the corporate form to prevent fraud or unfairness to third parties, we perceive little likelihood that equity will ever require us to pierce the corporate veil to protect the same party that erected it.”
In deciding whether to pierce the corporate veil, a plaintiff has the burden of proof and must present evidence that shows: (1) undercapitalization; (2) absence of corporate records; (3) fraudulent representation by corporation shareholders or directors; (4) use of the corporation to promote fraud, injustice, or illegal activities; (5) payment by the corporation of individual obligations; (6) commingling of assets and affairs; (7) failure to observe required corporate formalities; or (8) other shareholder acts or conduct ignoring, controlling, or manipulating the corporate form.
Because the application of these concepts is fact driven, the attorneys at GRIFFITH LAW GROUP LLC believe that any owner of multiple businesses should consult with an experienced business attorney to determine whether there is a risk of Affiliate Liability or the application of the Corporate Instrumentality Doctrine to the owner’s business ventures. With the help of a knowledgeable attorney, businesses can be properly structured and operated to avoid these liability risks.