Ignoring corporate formalities creates personal liability

While the comments in this article relate to corporations, a court could, in an appropriate circumstance, also impose personal liability on the owners of a limited liability company. Whatever form an entity takes, the legal formalities of such entity must be maintained, or a court may “pierce the corporate veil,” making owners personally liable for corporate debt.

Personal liability may be imposed on one or more of the following grounds:

Minimum capitalization. A company that is organized without sufficient funds, or sufficient insurance to cover losses, may make the owners liable for corporate debts. An entity should have enough capital to carry on the business enterprise without endangering the public.

Alter ego. If a company is indistinguishable from the person who owns it, such that the company may fairly be said to have no separate existence from the shareholder, courts may allow creditors to collect from the shareholders’ personal assets.

No issuance of stock. Corporations sometimes fail to issue stock certificates to their stockholders. Such disregard for corporate formalities may be a factor in imposing personal liability on owners for corporate debts.

No corporate meetings or minutes. Corporations are required to hold annual meetings of shareholders and directors. Failure to hold such meetings and to maintain minutes is often used as justification for piercing the corporate veil.

Commingling of corporate and personal assets. A corporation must have its own taxpayer identification number and its earnings should be maintained in separate banking accounts from the owners’ personal assets. If owners ignore the separate existence of a corporation, the court will likely ignore it, too.

Corporate funds used for personal expenses. Corporate funds should not be used to pay the owners’ personal expenses. A financial distribution should be made to owners, who in turn may pay for personal expenses.

Lack of corporate financial records. Closely related to the two prior points, a lack of maintaining the records of a company’s finances, such as income and expenses, may result in personal liability for owners.

Parent companies dominating subsidiaries. Parent companies may be held liable for the obligations of their subsidiaries if they dominate them to the extent that they have no separate will and are acting as mere agents.

Not holding business out as a corporation. Some companies do not hold themselves out as corporations. Parties dealing with them may not be aware the business is one with limited liability. In such an instance, courts may disregard the corporate protection as well.

By adhering to the corporate formalities outlined above, the personal assets of shareholders should be unavailable to corporate creditors.

Stephen F. Aton is a Springfield attorney practicing corporate, estate planning, personal injury and real estate law. He owns Aton Title Co. LLC and can be reached at steve@atonlaw.com.[[In-content Ad]]