Duhaime's Law Dictionary


Dummy Corporation Definition:

A corporation created solely for the purpose of insulating an individual or another corporation from liability in either contract or import.
A corporation has separate and distinct legal personality from the legal person of its shareholders. If a corporation loses litigation based on contract or import, be successful plaintiff cannot collect from the shareholders of the corporation; he or she is limited to collection from the liquidation of the assets of the corporation.

But where an individual sets up a corporation for the primary purpose of insulting him or her from liability, a court might, albeit rarely and only under the most egregious of circumstances, declare the entity a dummy corporation and expose the shareholder personally.

William Cook wrote:
"... (T)here are occasions where the court will ignore the corporate existence and will hold that it acts are the acts of its stockholders and vice versa the same as in a partnership. That is, where an individual organizes a corporation to violate a contract which he himself would not be allowed to violate, the court will enjoin the corporation as though it were the person himself...."

REFERENCES:

  • Cook, W., A Treatise on The Law of Corporations Having a Capital Stock (Boston: Little, Brown and Company, 1913), page 32
  • Salomon v Salomon 1897 A.C. 22

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