Avoiding Personal Liability for Corporate Wrongs

Many hear that one of the biggest benefits to forming a company is the avoidance of personal liability. The company is its own legal entity, able to sue and be sued, and when the company makes a legal error and owes money to another, it’s the company that’s liable, and not the owners or managers individually.

But the misconception is that this insulation is absolute, when in fact, someone can still be held personally liable even when acting in a corporate capacity in the right set of circumstances. Those circumstances go beyond just agreeing to be held personally liable in writing, which most savvy business owners know to avoid.

Individual Actions

One of the biggest areas where an owner or director may find themselves personally liable is for actions taken in their corporate capacity. In many cases, individual wrongs can impose personal liability, even if the person is acting for the good of the company.

When corporate officers act wrongfully in their individual capacity, it is not always a situation where a “lone wolf” sets off to do something behind the back of the company. In many cases, the individual may openly appear to be acting on behalf of the company.

For example, if you contract to supply goods to a purchaser, and the goods are supplied but are substandard, it is the company that will be sued and liable to the purchaser, not you individually.

But if you know that the goods will be substandard beforehand, and purposely set off to deceive the purchaser to buy defective goods, you now are engaging in fraud, a wholly personal wrong, which can lead to personal liability. This is true even if your contracts are signed in the name of the company, and even if the company received the purchase funds.

This is why corporate officers have to remember that the things they do or say to the outside world during the course of their business dealings can make a huge difference in whether they have personal liability. Misrepresentations, lies, and deception can always lead to individual liability.

Liability to the Company

Remember also that you may not only be personally liable to third parties, but to your fellow shareholders or members as well. As a manager or owner you have a fiduciary duty to your company.

Things like engaging in acts that are in conflict of interest with your company, or failing to abide by written obligations under a management or shareholders agreement can lead to you being personally liable to your own company.

And, while simply making mistakes, bad decisions, or being incompetent normally won’t subject you to personal liability, gross negligence or behavior that is totally beneath accepted business practices, can lead to personal liability as well.

Make sure you and your business are protected from potential liability. Contact Tampa business attorney David Toback to discuss protecting your business and its assets.

Resource:

corporatedirect.com/running-a-business/piercing-the-corporate-veil-how-to-avoid-it/

apps.americanbar.org/abastore/products/books/abstracts/5310344_chap1_abs.pdf