Are you personally liable for damages arising from the actions (whether negligent or intentional) of your employees? If one of your employees, during normal business hours, causes a serious accident while driving a company vehicle, are you (personally) liable for the damages/injuries? Are you personally liable for your business’ accounts payable to vendors, or loans from creditors?
The answers may depend, on your company’s books and records.
In virtually every state, the law provides that if the owners of the company do not follow general business protocols creditors (including people who file lawsuits) can “pierce the veil” and attribute personal liability to the owners of the company.
Your best defense to a lawsuit seeking to “pierce the veil” is to maintain good company records. This includes, but is not limited to:
- The existence of a company Minute Book. This is the repository of the company’s records. It normally will contain not only minutes of meetings[1], but also stock[2] or membership unit ledgers[3].
- The existence of Bylaws[4] or an Operating Agreement[5]. These documents normally address issues of business governance (including, but not limited to: who votes, the issues on which votes are taken, and how votes are counted), as well as tax issues. These documents may address relationships among the owners (buy/sell; rights of first refusal, transfers on death), but these issues are often addressed in separate documents.
- The issuance of Stock or Unit certificates. These are tangible evidence of business ownership. Most commonly the number of shares/units is less important than the percentage of ownership of the total outstanding shares/units. Not all shares or units need be exactly alike. For instance: there could be non-voting owners who share in the economic returns, but have no “voice” in the management of the company (“silent partners”); or certain owners may have a right to a preferential return (either as to income or as to liquidation, or both).
- Minutes of shareholder/member and director/manager meetings. Anything “material” (i.e. important and/or significant) should be documented in minutes. Determination of what is “material” will vary from business to business. Elections of directors/managers should be documented (particularly if there is a change of directors/managers). Meetings need not be held in person, or face to face. Telephonic, and/or e-meetings are becoming increasingly common. Resolutions affirming, authorizing, or directing, an action can be adopted without a meeting is the resolutions are contained in a signed document.
- Filing of all applicable tax forms on a timely basis.
- Absence of co-mingling of funds of the business and the owners; absence of payments of the owner’s personal expenses with company funds.
In short: if those who own and manage the business ignore business formalities, the law will ignore the separate existence of the business entity.
[1] Shareholder and director meeting minutes in the case of a corporation; member and manager meetings in the case of a limited liability company.
[2] For a corporation
[3] For a limited liability company
[4] For a corporation
[5] For a limited liability company
