Can I Be Personally Liable For My Company’s Debt?
When you incorporated your business, the idea was to protect yourself from personal liability. Generally, a court will not hold the members, directors or shareholders of a company personally liable for company debts. In some circumstances though, the court can hold the members, directors or shareholders personally responsible for company debts. This is called piercing the corporate veil.
Ordinarily, business entities are regarded as wholly and separate legal entities, distinct from the members or owners who compose the business entities. Thomas Berkeley Consulting Eng., Inc. v. Zerman, 911 S.W.2d 692, 695 (mo. App. E.D. 1995). Companies have their own social security number (called an EIN), own bank accounts, credit cards and loans. But when the company owners start mixing the personal and the business, it can open the owners up to personal liabilities. Additionally, when there is the existence of fraud, an inadequate capitalization of the company and a failure to follow corporate formalities, company owners can also face the same issues.
Real Estate Investors Four, Inc. v. Am. Design Group Inc., 46 S.W.3d 51, (Mo. Ct. App. 2001), discussed the three instances when personal liability can be imposed on members, directors and/or shareholders. In that case, the court laid out three elements to allow piercing the corporate veil: (1) complete control such that the corporate entity lacked a separate will at the time of the transaction; (2) the defendant used that control to commit fraud or another bad act; and (3) the previously mentioned control and breach of duty proximately cause the complaining party’s injury. Id. at 56.
While piercing the corporate veil has mostly applied to creditors of the company in the past, Missouri has now opened the door for minority members of a limited liability company to attack majority members. Hibbs v. Berger, 430 S.W.3d 296, 306 (Mo. Ct. App. 2014). Meaning, a minority member of a company who can prove those three elements, may be able to piercing the veil of the company and hold the majority member personally liable for injuries.
How To Protect Yourself
Each type of business entity has different requirements and regulations. Assuring you have all the documents in place when you incorporate your company is one of the most important steps in assuring you won’t become personally liable for company debts. If you form a limited liability company, make sure you have a detailed operating agreement. If you’re a corporation, make sure you have bylaws and minutes of all your meetings. In addition, make sure you file the required documentation with the Missouri Secretary of State.
Probably the hardest thing to do is make sure you don’t co-mingle your funds. What I mean by this is, keep your business bank accounts for business and your personal bank accounts for personal. I would recommend having your personal bank account at a completely separate bank than your business bank. This isn’t required, but I would highly suggest it.
When it’s time to pay yourself, write yourself a check from the business account and deposit it into the personal account. As temping as it is, don’t fall into the trap of swiping your business debit or credit card to pay for that personal expense. After the first time, you'll start justifying it over and over again, and it will just lead to needless headaches.
Be smart and keep everything separate and stay on top of your filing requirements! If you have been sued and the plaintiff is attempting to pierce your company’s corporate veil, contact Howard Law at (314) 833-3505 to help protect you and your business!
About The Author
Evan M. Howard is the managing attorney for Howard Law, a St. Louis business law and criminal defense law firm based in Clayton, Missouri. Howard Law is focused on giving honest, quick and effective representation to all of its clients. With a background in business and experience dealing with tough criminal prosecution cases, Howard Law is ready to help guide you through your legal matter.
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