When entrepreneurs are establishing themselves, one of the first issues they need to address is choosing the type of entity that they want to form. There are many determining factors to take into consideration, but often the deciding factor has to do with the liability protection that comes with being a corporation. Because corporations are entities unto themselves, their shareholders, directors and officers are generally shielded from being held personally responsible for the company’s liabilities. But it’s important to remember that there are certain circumstances where this does not hold true.
The protection offered by the corporate legal structure has certain limitations, and there are circumstances under which the corporate veil can be “pierced” and directors and officers held responsible. This happens most frequently when a court is convinced that the corporation was formed for the specific purpose of acting as a legal shield, but there are other times when the corporate protections fall away. The reasons directors and officers lose corporate law immunity include:
- Where a corporation has been established despite the business being inseparable from its owner. If the corporation uses a bank account that is also the primary personal account for the owner and the owner signs all contracts in their own name, then they are the corporation and the owner’s personal responsibility for corporate liability cannot be voided.
- If a corporation fails to follow any requirements imposed by the state in which it is incorporated (such as paying for a corporate registration or filing required paperwork) then it may legally lose its standing as a corporation, and any protections that go along with it.
- If a director or officer fails in their fiduciary duties to the corporation then they can be held personally responsible for any losses or damages imposed by their failure or self-dealing.
- If a business is set up as a corporation, it has certain legal obligations in terms of its procedures and documentation. Failure to adhere to these requirements serves as an indication that the corporate structure was chosen for the sole purpose of providing legal protections, and may invalidate protection from personal liability.
Corporate law is complex, and it is essential that anybody who chooses a corporate structure for its advantages understands and follows the requirements that go along with it. If you have questions or need guidance on your own liability as a shareholder, officer or director of a corporation, contact our office today to set up a time to speak with one of our experienced corporate law professionals.