Are Officers of a Corporation Protected from Lawsuits?

By Stephanie Kurose, J.D.

Are Officers of a Corporation Protected from Lawsuits?

By Stephanie Kurose, J.D.

Your legal liability as an officer or member of your company depends on the type of business structure you operate. Corporations, limited liability companies, and limited liability partnerships offer limited liability protection to officers so that they cannot be held personally liable except in very rare circumstances for any of the company's debts or legal obligations. In fact, that is why these types of business structures are so popular and common. However, there are some instances where officers of a corporation can be held personally liable for their actions.

Man in suit writing in notebook at desk

Corporate Personal Liability Protection

One of the advantages of structuring your business as a corporation is that it offers its officers personal liability protection. That is, creditors cannot pursue the personal assets of a corporate officer to pay corporate debts. In addition, an officer is generally not required to pay any company debts with his own money.

This corporate personal liability protection also extends to the corporation's shareholders. Thus, creditors cannot touch a shareholder's personal assets should anything go wrong with the corporation. Limited liability protection only covers valid businesses that incorporated properly under state law and maintain their status by paying all required annual fees and taxes.

Piercing the Corporate Veil

"Piercing the corporate veil" is a term of art used to describe a situation when a corporate officer is no longer protected by the corporation's personal liability protection. In certain narrow circumstances, this allows a creditor to "pierce the corporate veil" and go after the officer's personal assets in order to secure any payment owed to him by the corporation.

One of the ways an officer's personal assets can become reachable is if the company is being sued for a specific action of the officer, such as negligence or deliberately doing something illegal. For example, if an officer conceals facts that he is legally obligated to disclose, he may be held personally responsible. But usually, as long as an officer uses reasonable business judgment, the officer will be protected—even if it costs the corporation money.

A second way a creditor can pierce the corporate veil is if the corporation's structure is not preserved. For example, if the corporation does not hold annual meetings or follow the corporate bylaws or if the officers do not keep corporate assets separated from their personal assets, officers can be held personally liable for any corporate debts in a lawsuit. In these situations, the business is not actually running like a corporation, so it loses the limited liability of a corporation.

Indemnity Clauses

A corporation may choose to include an indemnity clause in its articles of incorporation to protect its officers or other employees if they are sued for actions they took in their official workplace capacity. Some corporations even buy liability insurance for such instances but indemnification clauses may be inapplicable in some situations so it is important to understand the laws of your state.

If you need to protect yourself, ensure that you maintain your corporate veil. Your company should add an indemnity clause into the articles of incorporation that can assist in the event that another tries to pierce the corporate veil and find the officers liable for certain conduct. However, to truly protect yourself, avoid engaging in harmful or bad behavior that could otherwise cause legal implications.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.