Do Not Expose Yourself to Personal Liability With Your NJ Business
THE FEAR OF "PIERCING THE CORPORATE VEIL" OF A NJ BUSINESS
Sometimes, courts in this state and elsewhere will allow plaintiffs to receive compensation from business corporate officers, directors, or shareholders for damages rather than limiting recovery to corporate resources. Personal immunity from legal liability is the usual corporate protection, but personal liability may be imposed in a variety of situations. Plaintiffs seek to "pierce the corporate veil” when they are looking for individual liability in business disputes. The specific criteria for piercing the corporate veil varies and may include the following:
 whether personnel from affiliates operate within an LLC without
failing to distinguish between the corporate entities.
courts will also consider whether the company fails to observe
corporate formalities, pays no dividends, is insolvent, lacks corporate
records, or is merely a façade for an individual’s or parent company’s
operations.
Overall, the Court looks to see whether the company is legitimately
a business or if the owners are simply seeking to hide behind the
shield of the LLC.
If a business corporation is indistinguishable from its owners in practical terms, courts will not allow owners to benefit from limited liability.
Example: Bill's Lawn Service, Inc. and Bill, individually share the same banking account. Bill signs contracts in his own name. Bill may be liable for breaching a business contract in NJ because he and his corporation are legally indistinct.
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If a business is formed for manipulation or fraudulent purposes, courts will allow lawsuits to be brought against the owners personally. If a business fails to follow corporate formalities in areas such as record-keeping and decision-making procedures, a court may impose liability on these individuals who control the day to day activities of the business.
If such a claim is made, the parties seeking to pierce the corporate veil have the burden of establishing that the corporate form should be disregarded. A careful study of the New Jersey doctrine related to piercing the corporate veil indicates that experts on this subject matter have rendered the opinion that the cases are inconsistent, and quite often the result will depend upon the particular trial judge’s sense of fairness.
While New Jersey law on "piercing the corporate veil" remains ambiguous and incapable of prediction. Certain generalized rules can be followed to help guide those individuals operating a NJ corporation to maximize the protection of their personal assets. Protection of personal assets is often the only reason owners and shareholders choose to form a corporation in the beginning.
The whole theory behind protecting personal assets is keeping the corporation separate from your personal life. This involves paying close attention to the structure and positions held by the owners of the shareholder corporation, including job titles. Documents (checking accounts, business cards, letterhead, designations on contracts) should be carefully designed and written. Most importantly, NEVER NEVER NEVER comingle funds between your personal and business accounts. Additionally, always operate the corporation in a way that distinguishes it from your personal life. Separate corporate identities should always be acknowledged and respected. For example, never pay a corporate debt with your personal account or with another business account. This behavior could lead to you or the other business becoming liable for the corporation whose debt was being paid off. Careful attention should be paid to the shareholder agreement which governs the corporate structure. Required meetings (perhaps annual – if so provided for in the operating agreement) should be conducted. Minutes should be maintained. Files should be "papered” and attention should be paid to details related to the maintenance of separate identities.
Generally, the purpose of operating under a NJ corporate structure is to avoid individual liability for the debts of the business properly operating within the confines of the New Jersey Corporation Act and to shield other assets. Maintaining that shield (or veil) requires more than just the initial formation and payment of the registration fee. One must operate carefully within the veil to maintain the veil.
For questions about a NJ corporation and the issue of personal liability against an officer or shareholder, please contact Fredrick P. Niemann, Esq. today. He can be reached at toll-free (855) 376-5291 or email him at fniemann@hnlawfirm.com.
The potential for personal liability encourages businesses in NJ to observe legal requirements and to avoid damage to third parties.
Let us help you with NJ business law advice to reduce the threat of personal liability. Contact Fredrick P. Niemann, Esq. toll-free at
(855) 375-5291 or email him at fniemann@hnlawfirm.com.
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Fredrick P. Niemann, Esq.,
a NJ Business Law Attorney
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