Can the Officer of a Corporation by Held Personally Liable?
Small Business
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Business Models & Organizational Structure
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Corporations
By
Terry Masters
Sometimes corporate officers can be held personally liable for their actions.
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An officer of a corporation can be on the board of directors or in the company's management team. In fact, an officer can be a shareholder, an employee of the company, someone appointed to the board who may or may not be paid for services rendered, or a person who wears multiple hats under these categories. An officer's personal liability for corporate affairs depends on the facts of the case and the officer's formal relationship to the corporation.
Limited Liability
One of the primary features of a corporation is the limited liability protection that incorporation provides. A corporation is an independent legal entity that is formed under state law and exists separately from its shareholders. Limited liability protects shareholders, directors, officers and employees against personal liability for actions taken in the name of the corporation and corporate debts. Ordinarily, an officer of the corporation, whether also a shareholder, director or employee, cannot be held personally liable.
Illegal Activities
Of course, if an officer does something illegal or grossly negligent, he can be held personally liable, even if his actions are done under the umbrella of the corporation. Officers who are complicit in misleading the public, lie to the government, bilk investors out of their money, steal corporate resources, embezzle, sexually harass others or do anything else that is illegal may personally face criminal or civil penalties and jail time.
Fiduciary Duties
Officers of the board of directors have a legal duty to act in the best interest of shareholders and maximize profits. While an officer of the board enjoys limited liability for actions taken on behalf of the corporation, if he breaches his fiduciary duties and engages in self-dealing or otherwise puts his own interest or the interests of a related party over his duty to the corporation, the officer may be held personally liable.
Piercing the Corporate Veil
A court can disregard a corporation's limited liability protections --called "piercing the corporate veil" -- if the court finds that the company is just a shell that allows the people involved to take advantage of creditors. If officers, directors, shareholders or employees treat the corporation as a piggy bank, mingling personal and business funds, and do not comply with the formalities required of a corporation, the court can hold the people involved personally liable.
Good Standing
A corporation is incorporated in the state where it files its articles of incorporation. Some states require corporations to file an annual report or pay an annual fee to keep the corporation's registration in good standing. If these obligations are not met in a timely fashion, the state may suspend the corporation's authority to do business in the state. If the corporation allows its state registration to lapse, the people involved risk personal liability exposure if the corporation is sued.
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