Grace Owen formed a corporation with three of her friends for purposes of operating a catering company.Grace used her own checking account to deposit the client payments and to make distributions of the corporation's profits to her three friends,who together owned 50% of the shares,with Grace owning the remainder of the shares.Grace promised her friends "no meetings,no formalities,we'll just run the catering business." Several wedding guests at a reception Grace's company catered became ill.Grace had not purchased insurance.The guests brought suit to recover their medical bills and other damages from Grace and her three friends.Grace says she has no personal liability for the bad food that resulted in their illness.
A)Grace is correct; their suit should be against the corporation.
B)Grace is incorrect because of the veil and alter ego theory.
C)Grace is liable, but her friends are not.
D)none of the above

Question

Quizplus · Accepted Answer

Grace cannot shield herself from personal liability by forming a corporation and failing to follow its formalities. The veil and alter ego theory allows the court to disregard the corporate entity when there is evidence that the corporation is the alter ego of its shareholder(s) or when the corporate entity is used to perpetrate a fraud or other wrongdoing. In this case, Grace effectively ignored the corporate formalities by commingling her personal finances with the corporation's finances and failing to purchase insurance. Therefore, the court may hold her personally liable for the damages caused by her company's catering services.

Grace Owen Formed a Corporation with Three of Her Friends