When Can the Corporate Veil Be Pierced?
One of the many advantages of starting a corporation is the protection that owners get from personal liability. There are differences between the extent and nature of the protections depending on the type of organization you choose (C-corp, LLC, LLLP, etc.), but generally, forming companies is thought of as a smart move from an asset protection standpoint. But there are limits to those protections of which business owners need to be aware.
The Protections of Forming a Company
In Florida, as in many other states, companies are separate legal entities. They are treated like people in the eyes of the law: they are able to sue and be sued, they pay their own taxes, and they can have both obligations and duties.
With most business entities, the owner or officers of a company aren’t personally liable for damages that the company may owe. This is a great advantage to starting companies—you do not put your personal assets at risk every time your company engages in a business transaction or does something that may incur liability. In fact, you can imagine how business development in this country would be stifled if every business owner had to worry about losing their personal property every time there was a lawsuit.
Restrictions on Corporate Protections
But there are restrictions on these protections; to be sure someone may be able to pierce the protections of the company and sue the owners or officers individually, often referred to as “piercing the corporate veil”.
Business owners should be wary when signing contracts and agreements not to sign in their own name. Documents and agreements should always be signed as your name, “on behalf of,” or “as officer of,” the corporation. There’s no magic language—any wording that sufficiently makes it clear that you are signing in your capacity as an officer of the corporation will suffice.
Quite obviously, any document that has a “personal guarantee,” or which requires you sign as both an officer of a company and in your name, could put your personal assets at risk.
Additionally, any wrong that’s committed by an officer individually will pierce the veil. An owner who individually defrauds someone, or interferes with another’s business relationships, or who steals intellectual property, may not be able to hide behind the corporate protections.
It’s important to remember that there is a difference between who can be sued and who will be held liable. Owners and officers can always be sued—there’s no way to stop someone from suing, and many times, companies and their officers are both sued when someone feels wronged. The question is whether that individual officer will be dismissed from any lawsuit. Many insurance companies offer policies that will protect individual officers—including paying for an attorney to defend their interests, so that even when they are wrongfully sued there will be little legal expense in mounting a defense.
Make sure your assets are protected and that you’re getting maximum benefit from the protections forming a company can provide. Contact Tampa business attorney David Toback to discuss your needs and protect your business interests.
