Think your corporation protects your personal assets? Would you bet your house on it? That is exactly what many small corporations are doing. The popular notion that incorporation will protect you from any personal liability has always been subject to exceptions. Those exceptions, however, are growing.
Historically, a major benefit of incorporation was that shareholders and officers have limited liability for the corporation’s actions and debts; meaning, they aren’t putting their personal assets on the line if something goes wrong with the business.
Generally speaking, to "pierce the corporate veil," or hold an owner or officer responsible for the actions of the business, someone has to show that the corporation really wasn’t separate from the owner or officer and that one person had total control of the corporation that caused an injury.
Although not always widely known, outside of actions taken as a shareholder or board member, individuals within a corporation are personally responsible for their behavior. Courts have held employees and presidents alike responsible for their own negligence or intentional misrepresentations.
More recently, however, courts are adding personal liability in two notable areas: under home improvement codes and "failure to act" cases.
In 2004, the Wisconsin Appellate Court decided consumer protection regulations allow for personal liability against an individual who devised an unfair method of selling home improvements. In that case, the court held the president of a closely held corporation personally liable for damages to a couple who hired him to remodel their home. That means he could have to pay the damages to the couple out of his own pocket. The court reasoned that because all business decisions were made by the president, he had total control over the methods of selling and was therefore personally liable to the homeowners.
Wisconsin is not alone in the expansion of personal liability for corporate owners and executives. A 2005 Illinois case held the president of a construction company personally liable for the corporation’s breach of a contract with homeowners. The president’s wife was the only shareholder, signed the annual corporate minutes as the director and the president wasn’t even a shareholder. The court found him liable anyway because he appeared to have all practical control of the corporation. So beware, if you have decision-making power, you could find yourself being held personally liable for the actions of your corporation.
The second area where personal liability is on the rise is "failure to act" cases, where someone with authority didn’t stop illegal things from happening. The Seventh Circuit of Wisconsin has held individuals personally liable for the corporation’s actions in FTC violations when the person was involved in or had authority to control the conduct.
Another case held the director of a corporation liable for civil theft by a contractor where he was generally retired but had set up the company’s procedures for pay-outs, and therefore, allowed the theft to happen. Since the director had the authority to prevent the theft and chose to do nothing, he wound up personally on the hook for it. Wisconsin courts have also held a supervisor liable when the corporation’s disposal operations violated hazardous waste laws. That supervisor was in charge of disposal and was found liable even though he didn’t personally participate in the violation.
Essentially, when you’re in charge – even if you don’t take part in them – you can still be in trouble if you let illegal things happen.
So, what is a good bet then? Aside from the sage advice to avoid all illegal conduct, consider the following:
• Document all transactions. All of them. I mean it, all of them.
• Have regular meetings and keep minutes of them.
• Conduct ALL business using the corporation’s name.
• Sign your name along with your position in the corporation.
• Make it clear to others you are acting on behalf of the corporation.
• Keep business and personal accounts separate.
• Never pay personal bills out of corporate funds.
• Pay all corporate officers with a formal paycheck.
• Do not loan the corporation undocumented money from your personal account.
• All officers of the corporation should be active participants in decision making.
• Make sure all corporate officers are familiar with the details of the business and can explain them intelligently to others.
• Keep records of how many shares were sold and for how much.
• If possible, do not sell shares to only one or two family members.
• Follow industry standards and practices.
• All selling practices should be closely monitored and based on written company policy.
While none of these methods are guarantees, they are a much safer bet for limiting your personal liability in the actions of a small or closely held corporation.
Attorney Jennifer Hayden is an associate at McCoy and Hofbauer S.C., Waukesha, where she practices in the areas of civil litigation, commercial litigation and insurance defense. Additional information is available at www.mh-law.us.
May 12, 2006, Small Business Times, Milwaukee, WI
