Shielding Yourself from Personal Liability
When you are starting a new commercial enterprise and are evaluating the potential business forms, one of the more attractive features of the corporate form is that it provides protection of your personal estate from creditors or persons suing the business. As a shareholder in a corporation, you can only be liable to the extent of your investment, i.e., the amount you paid to purchase your shares of stock in the company. The value of your stock may decline, but your personal assets will not be in jeopardy.
Ways that You Can Lose the Liability Protections of the Corporate Form
There are situations where a litigant or creditor of a business can ask the court to treat a shareholder as the “alter ego” of a corporation, allowing access to personal net worth. When this occurs, it is known as “piercing the corporate veil.” The actions that can provide a basis for piercing the corporate veil include:
- Intermingling assets and/or property of the shareholder and the company—When a shareholder uses company funds to pay for personal expenses, or uses company property for personal activities, a court may conclude that there’s no real distinction between the two.
- Using the corporate form to defraud a third party—If there is evidence that the corporate form is being used to mislead, defraud or otherwise cause financial injury to a third party, the court may permit the piercing of the corporate veil
- Failing to operate as a corporation—If the company fails to comply with corporate reporting requirements, fails to issue stock to owners or otherwise fails to act like a corporation, a creditor may be able to obtain access to a shareholder’s personal assets
- Failure to properly capitalize a company—If an individual creates a corporation, but fails to capitalize it, he or she may be personally liable to creditors
Contact Attorney Howard N. Sobel
At the office of Howard N. Sobel, we provide comprehensive legal counsel to businesses and business owners. Contact our office online or call us at 856-424-6400 to set up a free initial consultation. Evening and weekend appointments can be arranged upon request. We accept all major credit cards.
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