How well does my legal entity protect me from personal liability?
You think you’ve done everything right. You’ve formed your company. You filed your annual reports. You got insurance for your company. You trained your employees. Yet, you’re sued individually. To what extent are your personal assets at risk? In other words, how strong is the “corporate veil”? The answer is: you’d be surprised and it depends on how well you’ve respected the corporate form.
What’s the corporate shield?
The corporate veil is a legal term of art and legal fiction. The general rule is that the corporate form protects officers and shareholders from personal liability - i.e., it acts as a corporate shield. However, the corporate entity may be disregarded in some circumstances. One mechanism by which your personal assets may be reached is by “piercing the corporate veil.”
Piercing the Corporate Shield
Whether to disregard the corporate form and pierce the corporate veil is a question of fact and courts examine and render judgments on it on a case-by-case basis, including the following considerations:
The corporation or management engage in fraud or conspiracy to commit fraud or illegal conduct (we don’t protect personal assets where the beneficiaries would be fraudsters);
No legitimate separation between the owners and the legal entity, with such factors as:
Owners pay personal debts out of corporate funds or assets; or
Corporate managers make business decisions without appropriately recording them in corporate records.
Corporate employer willfully withholds wages - the decision makers have been found personally liable - where no bona fide reason to withhold wages.
Professionals who own an equity interest in a professional services company (lawyers, accountants, doctors) are not protected from liability for errors and omissions (malpractice).
Failing to withhold taxes owing to the IRS.
The same analysis goes for limited liability companies. Under RCW 25.15.061, “Members of a limited liability company are personally liable for any act, debt, obligation, or liability of the limited liability company to the extent that shareholders of a Washington business corporation would be liable in analogous circumstances. In this regard, the court may consider the factors and policies set forth in established case law with regard to piercing the corporate veil, except that the failure to hold meetings of members or managers or the failure to observe formalities pertaining to the calling or conduct of meetings is not a factor tending to establish that the members have personal liability for any act, debt, obligation, or liability of the limited liability company if the certificate of formation and limited liability company agreement do not expressly require the holding of meetings of members or managers.”
Responsible Corporate Officer Doctrine
In a sense, the doctrine is a mechanism of piercing the corporate veil but it’s also its own beast because you don’t have to engage in the traditional analysis required to pierce it.
In Washington State, if a corporate officer participates in wrongful conduct, or with knowledge approves of the conduct, then the officer, as well as the corporation, is liable for the penalties. It is distinct from alter ego or piercing the corporate veil.
In other words, if you direct, approve of, or ratify conduct that violates, for example, The Washington Consumer Protection Act, Chapter 19.86 RCW, and you are an officer, you will be held personally liable for the damages caused by your decision.
Consult with an Experienced Lawyer
It is paramount that you respect the corporate form and conduct your business in compliance with all laws and regulations. The failure to do so - by, for example, commingling personal funds and business funds - then you are at risk of personal liability. This means a judgment creditor can collect its judgment from your personal money and non-exempt assets. The Mayo Law Group PLLC has represented plaintiffs in obtaining judgments against corporate officers under the responsible corporate officer doctrine and also represents many businesses as general counsel, assisting them in maintaining their books and records properly, as well as complying with ongoing regulatory requirements. Schedule your free consultation today to see how we can help you.