Are Officers of a Corporation Protected From Lawsuits?

By Heather Frances J.D.

Choosing the legal structure of your company is one of the most important decisions you will make when starting your business. The type of business structure you choose helps determine your level of liability for corporate debts. Corporations, limited liability companies, limited liability partnerships and other forms of businesses can offer protection from lawsuits and other debts according to your state’s laws, but such protection can be limited or nonexistent under some circumstances.

Choosing the legal structure of your company is one of the most important decisions you will make when starting your business. The type of business structure you choose helps determine your level of liability for corporate debts. Corporations, limited liability companies, limited liability partnerships and other forms of businesses can offer protection from lawsuits and other debts according to your state’s laws, but such protection can be limited or nonexistent under some circumstances.

General Protection

Generally, a corporate officer’s personal assets are not vulnerable to pay corporate debts. This means a corporate officer is not typically required to pay business debts with his own money, although he could lose the money he has invested in the company itself. Since a corporation is an independent legal entity, this type of protection extends to both officers and shareholders, protecting their personal assets from things that might go wrong with the company. To obtain these protections, you must ensure that you have incorporated your corporation properly under the laws of your state and you must file all required paperwork, such as annual corporate reports.

Ready to incorporate your business? Get Started Now

Officer’s Acts

The general liability protection the corporate structure provides may not apply to officers if the officer is being sued for some specific act. For example, if you deliberately conceal facts that you are otherwise required to disclose to a federal regulator or shareholder, the law could hold you personally responsible. In some states, your actions on behalf of the corporation are protected if you used reasonable business judgment, even if it turns out later that your decision cost the company money. This protection, however, depends on state law. In some states, like California, it is not clear from existing law whether the business judgment protection applies to corporate officers or only to corporate directors.

Piercing the Corporate Veil

Officers who are also shareholders of the corporation may be held personally liable if the corporate structure is not preserved. This is particularly common in small corporations where a handful of people act as officers, directors and shareholders. If your corporation does not observe corporate formalities like having annual meetings, making decisions according to your corporate bylaws or keeping corporate and personal assets separated, you could be held personally liable for corporate debts in a lawsuit. The person suing you could ask the court to look past the formal corporate structure, which is called “piercing the corporate veil,” to determine if the business structure is merely a sham.

Indemnity Clauses

In the Articles of Incorporation, companies can agree to indemnify, or protect, their officers or other employees if they are sued for actions they took on behalf of the corporation. Corporations can even purchase liability insurance specifically to cover costs of lawsuits against their officers and directors. However, these indemnification clauses and policies may have restrictions that make them inapplicable in certain situations. For example, a clause that protects a current officer may not protect him if he resigns his position or moves to another company.

Ready to incorporate your business? Get Started Now
What Liability Does a Corporation Have for Its Officers?

References

Related articles

S Corp Limitations on Bonus Frequency

The corporate structure offers liability protection for you and your shareholders, but it requires you to observe corporate formalities. Thus, you cannot use the business as a piggy bank, taking distributions or bonuses whenever you need extra personal cash. While there’s no hard-and-fast rule about how often your corporation can give bonuses, using bonuses as a significant method of providing compensation risks tax and liability consequences.

What Are the Benefits of an LLC Business Structure?

While small business owners have a variety of options when it comes to choosing a form of corporate existence for a new enterprise, the limited liability company, or LLC, has become one of the most popular. Simplicity in creation and operation, flexibility in tax treatment and the provision of limited liability have made it an ideal choice for many small businesses.

Can a Company Be Held Liable if They Know They Did Wrong?

Companies are frequent targets of lawsuits because they usually have cash available to pay large settlement awards. Further, a company can be held liable for its wrongdoing in certain situations. Typically, a company will only be liable for wrongdoing if its agents had knowledge of the bad acts. However, under the doctrine of strict liability, a company may be held liable even if its officers were unaware of the wrongdoing. In addition to corporate liability, there is also the possibility that a company's officers may be held personally liable.

LLCs, Corporations, Patents, Attorney Help

Related articles

How Can a Person That Owns a Corporation Get Sued for Fraud?

One of the biggest advantages of a corporation is that this business structure protects controlling shareholders from ...

Can the Officer of a Corporation Be Held Personally Liable?

One of the most significant benefits to organizing a business as a corporation is that it protects the officers and ...

New York Corporation Laws

Although municipal law may apply to operational issues such as the acquisition of business licenses, and federal law ...

Oregon Limited Liability Company Act

Limited Liability Companies, known as LLCs, are business entities that may be taxed like partnerships but limit ...

Browse by category