Piercing the Corporate Veil vs. Alter-Ego

I got a call from a Florida businessman who owned a business in Jacksonville which had been sued. The court awarded a judgment against the business, but there is no judgment against the owner personally. The owner is considering closing down the debtor business and starting a new company doing similar kinds of things for similar clients. The owner asked me if the creditor could “pierce the veil” of the new business.

The question as phrased points out a subtle distinction between the concepts of piercing the corporate veil and that of attacking a successor corporation under the theory of alter-ego and business continuation. The legal issue in this caller’s situation is not one of “piercing the veil” but is whether the proposed new business would be considered a continuation of the debtor business and merely the alter ego of the debtor business.

When a newly formed business starts off its operations with the assets of a prior business, the creditor of the prior business should be able to execute upon the same assets under the theory that the new business is alter ego of the prior business. Alter-ego theory would apply when a new business has, for example, the same ownership, physical assets, customers, a similar name, the same location and phone numbers, and other forms of goodwill transferred from a debtor business.

Piercing the corporate veil, on the other hand, typically applies when a creditor wants to penetrate a corporate shield to obtain a personal judgment against the business owner. It is very difficult to pierce a corporation in Florida and most other states.

A creditor can obtain a personal judgment against an owner who set up a corporation in order to defraud creditors and when the company is operated as a sham and as an alter-ego of the owner.