Most organizations interested in forming a corporation or limited liability company do so because they are interested in the limitation on personal liability the corporate/company form offers. Under North Carolina law, a corporation or a limited liability company is treated as a separate entity apart from its shareholders, employees and officers or directors. As a result, a corporation or a limited liability company can enter into contracts, buy and sell personal property and real estate, sue and be sued. Furthermore, a shareholder, officer or director is not personally liable for the wrongdoings of other shareholders, officers or directors, nor are they personally liable for the debts of the corporation or company. This makes sense because after all, the corporate form was invented to allow people to invest in a company and risk only their investment, not their personal assets.
However, there are exceptions to every rule. Generally, shareholders, directors, officers, agents and employees are still liable for their own personal acts and omissions. One cannot escape personal liability merely by proving that the corporation or company you work for is also liable for your actions.
Moreover, failing to follow corporate formalities can result in the owners of a corporation or company being held personally liable for the company’s obligations. This is particularly true when the owners of a company allow the company’s charter to expire or be dissolved. Once dissolution occurs, the company ceases to be a separate legal entity and the individuals conducting business can be held personally liable for every action the company takes, much as in a sole proprietorship. It is surprising to note that a lot of corporations and companies allow their charter to be dissolved administratively every year by the North Carolina Secretary of State when they fail to file their annual reports.
North Carolina Courts will also hold an officer of a corporation or company personally liable for any dealings that benefit the officer personally rather than the company. While corporations and companies are allowed to indemnify officers and directors, they typically exclude situations involving the director or officer engaging in behavior for their own benefit. In addition, officers and directors need to be careful to make it clear to other parties with whom they are conducting business that they are acting on behalf of a corporation or company. Otherwise, they risk being held personally liable for any transaction they finalize even if it is for the corporation or company’s benefit.
Sometimes North Carolina Courts determine that a corporation is being used as an alter ego of a sole shareholder, dominant shareholder or a parent company. Courts have a list of non-exclusive factors to consider when determining if this is the case with the following behaviors being “red flags” that could lead to “piercing the corporate veil” and a finding of personal liability:
inadequate capitalization;
failure to comply with corporate formalities;
complete domination of the subject corporation or company;
excessive fragmentation of one enterprise into several;
insolvency;
transferring of funds from one entity to the other;
officers or directors not participating in the running of the company; and
an absence of corporate records.
The doctrine is an equitable one, i.e., the Courts are supposed to do what is fair and place the burden of a loss on the responsible party, which in these cases may be the individual, not the company or corporation. As a result, there is no magic formula that if followed, will prevent the Courts from “piercing the corporate veil” and holding someone personally liable.
While incorporating can bring with it many benefits, securing those benefits involves a lot more than filling out a form and sending it and a check to the Secretary of State’s office. You should consult with an attorney to make sure your corporate or company documents provide the protection that you need.