Can a Business Owner Be Held Personally Liable for the Debts of a Business?

Sometimes business owners and shareholders can be sued for business debts

Many businesses incorporate or create limited liability companies (LLCs) to shield their owners from personal liability for business debts. However, there are circumstances in which legal formalities can be set aside to reach an owner’s individual assets. Courts may allow a plaintiff to sue the owners by taking an action known as piercing the corporate veil.

If you’re an owner, you should understand the situations in which piercing the corporate veil is possible. The New York business lawyers of Rosenbaum & Taylor are here to explain. To learn more and to defend your and your company’s best interests, contact us today.

What Is Piercing the Corporate Veil?

The legal protections offered by corporations and LLCs are not absolute. Courts can, in some cases, hold individual owners, members, or shareholders personally liable for business debts and obligations. This is where piercing the corporate veil comes in.

Piercing is possible if the owners fail to maintain a separate legal existence between their personal affairs and the company. The court will first need to examine the relationship between the company and its owners. In so doing, the court will determine whether to pierce the corporate veil and allow the owners to be held liable.

What Does a Plaintiff Have to Prove?

In a lawsuit seeking to hold business owners liable for their business’s debts, a plaintiff must prove the following:

  • The owners completely dominated the corporation, with respect to the liability or transaction in question.
  • This control of the business was used to commit fraud or wrongdoing against the plaintiff.
  • Such fraud or wrongdoing caused injury to the plaintiff.

The first element can be one of the more challenging to prove. The plaintiff must essentially show that the owner used the corporation for his or her personal benefit. This is more than merely having the corporate form to protect against personal liability, which is a standard reason to incorporate.

It must be shown that the corporate form was abused to commit wrongful acts. Basically, the court wants to know whether the company is nothing more than an alter ego of its owners. A New York business law attorney can explain more about this element to you and your company.

Evidence That May Support Liability for Business Debts

Some specific facts that a court may rely on when an owner is sued for business debts include the following.

Insufficient Capitalization

In other words, the owners have not invested enough capital in the business. This would be necessary in order to actually operate the company as a separate, standalone entity.

Disregard of Corporate Formalities

These formalities include holding regular meetings, keeping accurate and updated records, adopting bylaws, and more. It may also include how the company holds itself out to others; for instance, whether corporate titles are used in business dealings.

Mixing Personal and Company Assets

More specifically, did the business maintain separate bank accounts and books from those of its owners? Were business funds used to pay for personal expenses? How was business property titled and what was it used for?

Smaller businesses may be given some leeway since they often lack the sophistication of larger companies. But the bigger the business, the more likely a court will stringently apply the above considerations in determining whether to pierce.

A New York Business Lawyer Is Ready to Assist You

It is essential to have experienced legal counsel if you are seeking to sue a business owner for a company’s obligations or are facing such a lawsuit. We can help. Rosenbaum & Taylor’s New York business litigation attorneys are well-versed in the various laws surrounding corporations and piercing the corporate veil.

To learn more and to defend your and your company’s best interests, contact us today.

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