- While Inc. provided 10% of the capital used to launch LLC, Inc. only was given a 0.1% equity stake in LLC.
- From 2011-2013, LLC’s 17 employees worked exclusively for Inc., and such work was outside the scope of LLC’s stated business purpose.
- While Inc. supposedly leased space from LLC, there was no written lease, the amount of rent paid varied from year to year, and LLC booked these supposed rent payments as payments for the work its employees provided to Inc..
After considering all of the foregoing, the Court ruled that:
The evidence established that there was common ownership of [Inc. and LLC] by Wilfred Cameron, who controlled the two entities and there was intermingling assets. [Inc.] was thinly capitalized, and the two entities observed only minimal corporate formalities by filing separate tax returns and Annual Reports. There [also] was no evidence of other corporate record keeping or payments of dividends.
As such, the Court allowed the Trustee to apply assets of LLC to the debts of Inc. More generally, and as Cameron and numerous other cases have noted, in evaluating whether one entity can be liable for the debts of another, courts will evaluate the following factors:
(1) Common ownership; (2) pervasive control; (3) confused intermingling of business activity assets, or management; (4) thin capitalization; (5) nonobservance of corporate formalities; (6) absence of corporate records; (7) no payment of dividends; (8) insolvency at the time of the litigated transaction; (9) siphoning away of corporate assets by the dominant shareholders; (10) nonfunctioning of officers and directors; (11) use of the corporation for transactions of the dominant shareholders; (12) use of the corporation in promoting fraud.
So while setting up a new entity may be a prerequisite to insulating an existing business from liability, such protection only will be achieved if continued diligence in keeping the companies separate is exercised.