Generally, corporate shareholders cannot be held liable for the acts or debts of their corporation because liability is specifically limited to their investment in the corporation via the purchase of shares. However, a shareholder may be held personally liable if a court permits another party to “pierce the corporate veil” to avoid fraud or unfairness to as a result of circumstances where the corporation has taken advantage others of by abusing corporate protections.
Because there are legal and public policies favoring incorporation, there is typically a high burden of proof associated with actions seeking to hold shareholders liable for corporate debts and liabilities. To pierce the corporate veil and hold shareholders personally liable, the shareholders must have abused the privileges afforded to corporations and that fairness requires holding the shareholders liable.
A plaintiff or other creditor may ask a court to pierce the corporate veil to allow them to recover from the corporation’s shareholders. The plaintiff or creditor will have to show that the shareholders abused the privilege of incorporating in some way, such as regularly taking corporate funds for personal use, intermingling of funds, purposefully keeping the corporation insolvent or without sufficient funds to pay its debts (undercapitalization), defective or inactive corporate formation, excessive dividends or other payouts to directors, absent or inaccurate corporate records, and misrepresentation or unfair dealings. Shareholders will be held jointly and severally liable for the entire debt owed to a plaintiff or creditor.
Ezer Williamson Law provides a wide range of both transactional and litigation services to individuals and businesses. We have successfully prosecuted and defended various types of business and property claims. Contact us at (310) 277-7747 to see how we can help you with your business law concerns.