Also known as:dummy corporations · dummy corp · shell corporation
Written by attorneys · grounded in primary & secondary sources — see below
A corporation formed with minimal capitalization and no independent operations that serves solely as an instrumentality or alter ego of its controlling shareholder. Observance of its separate form is disregarded when doing so would sanction fraud or promote injustice, allowing creditors to reach the shareholder's personal assets under a two-prong test focused on unity of interest and equitable considerations.
Sources & Authorities
How it applies
Common Examples
2
Undercapitalized Hotel Operator
Randall formed Fair Stay to operate a boutique hotel and entered a contract with Premier Hotels to host weddings. Randall deposited all revenues into his personal account, issued no stock, held no meetings, and kept no records while starting with only nominal capital that proved inadequate during a downturn. Premier Hotels sued both Fair Stay and Randall after nonpayment. The court disregarded Fair Stay's form because Randall treated it as his personal venture with no separate existence, satisfying the unity prong and making it unjust to leave Premier without recourse.
Railroad Lease Evasion
A railroad created a dummy corporation to operate mining activities and directed its own management to control the operations. The controlling shareholder commingled all revenues and maintained no separate records or capitalization. A creditor sued both the dummy and the railroad after default. The court disregarded the dummy's form under the two-prong test because the railroad treated it as its alter ego, satisfying unity of interest and making it unjust to leave the creditor without recourse.
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Cases
Dictionaries
Common questions
Frequently Asked
3
What facts typically establish that a corporation is a dummy or alter ego?+
Commingling of funds, failure to issue stock or maintain records, absence of formal meetings, and severe undercapitalization relative to the entity's obligations all indicate that the corporation lacks any independent existence and functions only as a shareholder's instrumentality.
Supporting sources
When does respecting a dummy corporation's form promote injustice?+
Injustice arises when a creditor reasonably relied on the apparent corporate entity, the shareholder used the shell to shield personal assets while conducting business, and the corporation's inadequate capitalization leaves the creditor with no meaningful recovery against the empty entity.
Supporting sources
Does filing required state reports prevent a finding that an entity is a dummy corporation?+
No. Nominal compliance with filing requirements does not overcome pervasive disregard of corporate separateness through commingling, lack of records, and undercapitalization when the overall pattern shows the entity was never intended to operate independently.
Supporting sources
799 F.2d 265 (7th Cir.1986)Contracts
…“company ... operating a ... railroad,” can without contortion be interpreted to cover a situation where the railroad sets up a dummy corporation to hold a mineral lease on federal lands and places control of the mining operations in the railroad’s management; if such facile evasions could not be prevented, the statute would have…
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