Book Opener

Depending on the facts, the court may rely on one of two theoriesto pierce the corporate veil:l The alter ego theoryl The justice theoryThe alter ego theory is used when the corporation has not been permittedto become an independent entity. The court looks at several thingsto determine whether a subsidiary is independent. For instance, the courtlooks at the management structure of the subsidiary and the parent company.If they shared the same directors and officers, and if decisionsthey made were always in the best interests of the parent company, itwould suggest the need to pierce the corporate veil.The justice theory is used when an individual or a parent corporationforms a corporation to defraud, to circumvent the law, to avoidpaying a legally owed debt, or to violate the law in some way.New and Hybrid Business EntitiesA relatively new type of business is called a sub-chapter S corporation.In contrast with a corporation, an owner of an S corporation avoids doubletaxation at both the corporate and individual ownership levels. Rather, he orshe is taxed only as an owner, meaning that losses can be deducted from workincome in bad years and profits can only be taxed once during good years. Tobecome an S corporation, a business must incorporate in the usual fashion andthen apply to the Internal Revenue Service.Another new business entity is the limited liability corporation (LLC). An LLC is across between a partnership and a corporation. Like a corporation, an LLC offersthe protection of limited liability to its owners, and like a partnership, the owners’profits are only taxed once. An LLC is distinguished from an S corporation becauseunlike the latter, it does not have a limit to the number of shareholders.In 1991, Texas created the limited liability partnership (LLP). This form wascreated to make it easier for existing partnerships to gain the advantages of anLLC, a process that hitherto had been complicated by the process of dissolvinga partnership and recreating it as an LLC. Like an LLC, an LLP avoids doubletaxation and typically limits the liability of partners against torts committed byothers involved in the partnership.Research Activity Using the Internet, library, or other resource, research howeach of these kinds of businesses are formed. Share your findings with the class.Chapter 28: Forming and Financing a Corporation 619