What is an Alter ego ruling?

This is very similar to the notion of piercing the corporate veil (aside from certain technical distinctions that are being ignored for the purpose of this discussion). Owners of corporations (i.e., its shareholders) are generally not personally liable for debts, losses and liabilities of the business itself, because of limited liability. Jedoch, if those owners have acted in a way where their business is really just a shell, and not an entirely separate legal entity, a court may decide that the business is simply an alter ego, meaning the owners should be held personally liable because of their wrongful acts. In fact: this ruling applies mostly to single member or single shareholder companies.

This is the same principle behind the Controlled Foreign Company (CFC) rule.

There are many things that a court will look at in determining whether alter ego liability should be applied. Typical factors include (but are not limited to) whether the company kept its own records, whether there were shares (for a corporation) or units (for an LLC) that were actually issued, whether the owners co-mingled their finances with the business entity, whether there were actually corporate directors or LLC managers running the business, how legal formalities were followed and whether the owners used the business for personal purposes. It is often a case-by-case situation, and the key here is that you should take every precaution to run your business in full compliance with the legally required formalities and use the business in a proper way in order to avoid such alter ego liability.