What Liability Does a Corporation Have for Its Officers?

By Jeff Franco J.D./M.A./M.B.A.

Employees of a corporation, which includes its officers, generally aren’t personally liable when engaging in business transactions or otherwise acting as a representative of the business. Instead, the corporation is solely liable for the acts of its officers. However, exceptions do exist when a corporation’s officers act outside the scope of their duties.

Role of Corporate Officers

Every state has the authority to create laws that govern corporations, including the extent of a corporation’s liability for its officers. However, many states follow the Model Business Corporation Act, which includes provisions that specifically govern a corporation’s liability. The MBCA allows a corporation to determine the extent of its officers’ authority to represent the business. Provided the officer engages in all corporate transactions and activities in good faith, he isn’t liable to the corporation in situations when his actions result in debts or losses. In these cases, the corporation is directly liable for any transaction the officer enters into on behalf of the business.

Civil Liability

There are situations, however, when a corporate officer is personally responsible for his actions. For example, if the officer engages in activity that results in physical or financial damage to a third party, the corporation may be subject to a civil lawsuit that can potentially result in a money judgment in favor of the plaintiff. The corporation is generally liable for payments awarded in a civil lawsuit. However, if the basis of the lawsuit relates to an officer’s negligence or fraud, for example, the officer can be personally liable for paying the judgment.

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Criminal Liability

A corporation can be liable for the criminal activity of its officers if the criminal acts are closely related to their employment with the corporation. However, whether an officer was acting within the scope of his employment can be a debatable issue. Generally, there must always be a rational relationship between an officer’s corporate duties and the crime, meaning the crime must occur while the officer is working. For example, if an officer of a corporation is involved in a car accident while under the influence of alcohol and driving a company car to accomplish a work-related task, the state can press charges against the officer as well as the corporation. In this case, whether or not the corporation is criminally liable depends entirely on whether the prosecution can sufficiently establish that the officer was acting within the scope of her employment.

Sarbanes-Oxley Act Violations

The Sarbanes-Oxley Act is a federal law that requires public companies to implement a number of procedures to ensure that the financial statements they issue are accurate and reflect the true earnings of the business. The main purpose of this legislation is to protect shareholders and creditors from making investment decisions based on financial reports that are innaccurate and misleading. As an additional incentive for corporate officers to comply with Sarbanes-Oxley, the federal government imposes liability directly on a corporation’s chief financial officer and chief executive officer if they certify financial statements that are inaccurate.

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

References

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