Exceptions to the Limited Liability Protection of a Corporation

The limited liability protection offered by corporations normally protects the personal assets of its directors, officers and shareholders. It is the primary reason most business owners choose to incorporate a business. However, you should be aware there are certain exceptions that also apply to LLC’s and other business entities offering limited liability protection. The following exceptions are most common.

Personal Guarantee

Principals in a business, particularly a newly formed business, are often required to personally guarantee loans and/or extensions of credit to the business. Of course, this means they will be held personally liable for any such indebtedness the corporation does not take care of. Personal guarantees, other than those which are absolutely necessary, should therefore be avoided.

Taxes

Payment of taxes is of utmost importance since both the IRS and the state will probably try to collect any unpaid income, payroll, and other taxes from “responsible persons”. “Responsible persons” would include a small corporation’s principal directors, officers and shareholders. You can protect yourself by making sure all of the corporation’s taxes are paid on time.

Lax Procedures

A court may “pierce the corporate veil” and hold a corporation’s principals personally liable if the court finds they have not operated the business as though it is a corporation and are therefore not entitled to the limited liability protection they would otherwise have. Diligent compliance with all applicable laws, rules, regulations and procedures will eliminate this possibility.

Illegal Activity

Using the corporation for some illegal activity or to perpetuate a fraud could result in a court “piercing the corporate veil” and holding you personally liable for losses sustained. Needless to say, you should never be involved in anything that is dishonest or illegal.

Reckless Decisions

The courts may also “pierce the corporate veil” and hold you personally liable if you are found to have made intentionally reckless decisions that result in damages to others or their property. Never make what could be considered a reckless decision that could result in injury to anyone.

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