As a private citizen, you may have heard about corporate scandals and the corporate veil. In an attempt to pierce that veil, the government has imposed a series of laws that can render limited liability benefits void should business directors and officers engage in certain actions. In some cases, you simply will need to separate your personal assets from your business assets. However, you’ll also want to avoid a few key actions.
When a Business and Its Owner Are Indistinguishable
If you and your business are practically indistinguishable, you may not benefit from limited liability protections. In other words, should you be required to offer compensation for damages, your personal and business resources will suffer the penalty. In what situations might your business be considered indistinguishable from you personally?
Let’s say Jordan owns a company named XYZ Services. Jordan has one bank account for both personal and business banking transactions and signs business contracts with her personal name instead of the business name. In the event of a breached contract, Jordan and her business will likely be considered legally indistinct. This means she will personally share liability with her company, and in the event of reparations, her personal assets may be penalized in addition to her business assets.
When a Corporation Was Established for Fraudulent Purposes
You may have heard of those big Wall Street scandals where large corporations hide money in fake accounts or companies. Those dummy enterprises were formed solely for the purposes of fraudulent and often criminal activities. Because these false corporations were created with the intention of wrongdoing, those involved (i.e., directors, officers, CEOs, etc.) will also be liable for any damages caused to clients.
Of course, should this happen to you, your intentions for wrongdoing must first be proved before the courts would penalize your personal assets. However, you can easily find cases where company executives were personally penalized for fraudulent activity related to dummy corporations in addition to their employing corporation.
When an Enterprise Disregards Corporate Formalities
In a legally recognized entity, you and your fellow company officers are responsible for a range of standard corporate activities, such as record keeping or following proper decision-making procedures. Many of these formalities are governed via state and federal laws and may be enforced through either local or national entities.
Because you are responsible for maintaining these records, your personal assets may be penalized if you or your directorial team fails to adhere to proper procedures. To understand what your legal obligations are, you should consult with both federal and state laws related to businesses and your industry specifically. Additionally, consult with your legal team regarding the steps necessary to maintain legal daily operations and corporate records.
Why Recovery Isn’t Limited to Corporate Resources
As you’re reading over these common cases where reparations are not limited to corporate resources, you may wonder why these legal guidelines were imposed at all. In many cases as a business owner, it is good business to separate yourself from your business actions. For example, if your business defaults on a loan, you may save your personal credit from harm if you have drawn a distinct line between business and personal finances.
However, these laws are designed to protect the consumer and encourage corporation owners to engage in ethical business practices. Ideally, the possibility that liability may extend to company officers and directors in the event of certain actions gives the consumer protection against those who might wish to take advantage of lack of liability.
These legal regulations are designed to protect consumers and encourage ethical business practices at the corporate level. However, these laws also apply to small enterprise in many cases, so be sure to understand how these regulation apply to you and your growing enterprise.
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