business owner alter egoFor purposes of seeking protection against individual liability, it is not uncommon for small business owners to form a corporation and operate the business through the corporation.

In the recent case of Leek v. Cooper (2011) 194 Cal.App.4th 399, the court addressed the issue as to whether or not the sole shareholder of a corporation that was operating a car dealership could be held individually liable for age discrimination on the basis that the sole shareholder had actual control over the affairs of the business.  The court in Leek held that the shareholder is not liable for employment discrimination based upon the degree of control exercised by that individual over the corporation.  Rather, to impose personal liability on the sole shareholder, a plaintiff must plead and prove liability under an alter ego theory.

In Leek, the employees of the car dealership sued the corporation and its sole shareholder alleging causes of action for age discrimination and violation of the California Family Rights Act.  The trial court granted the shareholder’s motion for summary judgment on the ground that only the corporation as the employer may be liable to an employee for discrimination under the California Fair Employment and Housing Act, or for violation of the Family Rights Act.  The employees argued that the shareholder was an employer under the statutes because the shareholder was the person that controlled the employees.

The Court of Appeal in Leek affirmed the order granting the shareholder’s motion for summary judgment, concluding that the shareholder’s control over the employees was not the proper test to determine whether or not he was the actual employer.  To impose individual liability, the court in Leek held that a plaintiff must plead and prove alter ego liability to hold the individual shareholder liable for the actions of the corporation.  As the plaintiffs in Leek had not properly pled a claim of alter ego liability, they had no valid claim against the individual shareholder.

The holding in Leek further demonstrates the importance of selecting the appropriate form of business when an individual sets up a business plan. Use of a corporation to operate a small business is effective when the desired result is to control individual liability.  Under a claim of alter ego liability, also known as piercing the corporate veil, an individual may be found to be liable for the debts of the corporation.  However, it is difficult to establish alter ego liability as such a claim requires proof of a disregard of the corporate entity such that the individual and corporation are, for all purposes, one and the same.  As a result, if the applicable corporate formalities are followed in conducting business under a corporation, an individual can successfully limit personal exposure, including claims for employment discrimination.