22/09/2020 by George T. Baxter, Esq. 0 Comments
Personal Liability for Business Owners: Piercing the Corporate Veil
So you managed to build a business and create a comfortable life for your family. However, more and more aggressive lawyers and plaintiffs are suing the business owners individually in business related lawsuits, which threatens your life-style. In my 35 years of practicing business & partnership law I have represented business owners in […]
So you managed to build a business and create a comfortable life for your family. However, more and more aggressive lawyers and plaintiffs are suing the business owners individually in business related lawsuits, which threatens your life-style. In my 35 years of practicing business & partnership law I have represented business owners in arbitrations, mediations and trial. Here are a few tips on protecting yourself from personal liability.
- Execute and sign business documents in the name of the business. For example, use you company title and be clear you are executing the document only in the official capacity of your business.
- Maintain separate checking and business accounts from your personal accounts. Do not co-mingle funds between the two accounts.
- Adequately fund your business account. Be sure there is enough money in it to cover the expected business expenses. Do not pay the business expenses from your personal accounts.
- I recommend maintaining business insurance separate from your personal lines of insurance.
- An LLC should have an operating agreement that clearly spells the purpose of the business and obligations of its partners or owners. When disputes arise, the operating agreement will control unless it conflicts with New Jersey statutory law.
- Officers of the LLC may or may not have an employment agreement with the LLC that states
- Sometimes disputes arise between owners about the valuation of their ownership interest. This will usually occur when a partner retires from the LLC or business. Be sure to include how to deal with this situation to help avoid litigation.
- Pay attention to the corporate form. This means hold shareholder and member meeting and keep records of board meetings.
Following is a brief discussion on how court decisions have affected the business owner’s personal liability. The legal term is “piercing the corporate veil.” This is the legal term for piercing the protections an LLC or business is intended to provided to its owners for the purpose of personal liability.
So You Think It’s Safe? Think Again.
As a general principle, members of an LLC are not personally responsible for the debts, obligations or liabilities of the LLC. The usual risk to business owner or LLC member is the loss of their investment as a result of the activities of the LLC and its financial debts.
The New Jersey legislature provides these protections for business persons so that they may conduct businesses in New Jersey. N.J.S.A. § 42:2C-30, provides, “The debts, obligations, or other liabilities of a limited liability company, whether arising in contract, tort, or otherwise: (1) are solely the debts, obligations, or other liabilities of the company; and (2) do not become the debts, obligations, or other liabilities of a member or manager solely by reason of the member acting as a member or manager acting as a manager.”
“The failure of a limited liability company to observe any particular formalities relating to the exercise of its powers or management of its activities is not a ground for imposing liability on the members or managers for the debts, obligations, or other liabilities of the company.”
PIERCING THE CORPORATE VEIL
However, the personal protections provided above are not absolute and in some circumstances an LLC member or business owner may be responsible for liabilities of the LLC. This is the doctrine of piercing the corporate veil.
Many states apply the corporate veil piercing doctrine to LLCs. Here are a few case examples of a debtor collecting a judgment personally from a business owner.
BUSINESS OWNER LIABILITY
In Verni ex rel. Burstein v. Harry M. Stevens, Inc., 387 N.J. Super. 160, 199 (App. Div. 2006) (quoting Trs. of the Nat’l Elevator Indus. Pension, Health Benefit & Educ. Funds v. Lutyk, 332 F.3d 188, 193 (3d Cir. 2003)), the court stated, “iercing the corporate veil is not technically a mechanism for imposing ‘legal’ liability, but for remedying the ‘fundamental unfairness will result from a failure to disregard the corporate form.
In Ten West Condominium Owners’ Association, Inc. v. LRG Realty, LLC, 2017 N.J. Super. Unpub. LEXIS 1780, *17 (App. Div. 2017), the court stated, “Piercing the corporate veil is a doctrine designed to address an otherwise enforceable judgment that is rendered unenforceable because the defendant is a corporate entity without sufficient assets to pay it.
“The doctrine’s purpose is to prevent a corporation or limited liability company ‘from being used to defeat the ends of justice, . . . to perpetrate fraud, to accomplish a crime, or otherwise to evade the law.'” Id. (quoting State, Dep’t of Environmental Protection v. Ventron Corp., 94 N.J. 473, 500 (1983)).
These cases are examples of where in the “interest of justice” courts have found personal liability personally against the owner to prevent a debtor form being cheated. The court will consider the factors listed above to help determine whether the business owner should be personally responsible for the business debt.
I still other situations, the business owners may be personally responsible not only in contractual and debt litigation, but also tort litigation. A personal injured by a product may attempt to name the owner of the company when there is insufficient insurance to cover the injury.
These are only a few examples of the problems business owners face in protecting their personal assets while conducting business. Every case is different and depends on the circumstances of each situation. My office handles business and partnership disputes. Most are resolved through negotiation or mediation. In a few exceptional cases we are force to trial to resolve the dispute. If this is the case, it is good to know that George T. Baxter, Esq., is an experienced trial lawyer who has won millions of dollars for corporate clients through mediation.
If you want to discuss your business situation with an experienced trial lawyer then feel free to contact my office.