Owner Liability for Corporate Acts, or Piercing the Corporate Veil

What Happens When A Company Fails?

Editors Note: This post was original published in February 2010 and has been updated for accuracy and comprehensiveness.

Companies fail, as the news reminds us time and again. There are many things to worry about if your company is shutting down. At the top of the list are the company’s debts and liabilities. Who do they fall on? If you’re an entrepreneur sued in commercial litigation, are you personally responsible for your company’s debts? There’s no shortage of business lawyers in Philadelphia writing about this issue, but we often hear that most of the articles are difficult for the average business owner to understand, because the answer unfortunately really rests on the facts of your case.

The general rule is that Pennsylvania courts are hesitant to hold owners responsible for something the company does, called piercing the corporate veil in legalese. The main exceptions are:

(1) when an owner doesn’t treat the company as a separate entity, doing things like making random withdraws from the business account instead of taking a salary;
(2) when the company is used in a fraud, such as for an investment scam or contractors who take deposits but never intend to do the work;
(3) when the company doesn’t follow the corporate formalities, such as forgetting to maintain the minute books every year, even if there is only one shareholder; or (4) when the company is undercapitalized from the start.

To some degree, with the exception of the fraud rule, probably every small business in America is guilty of violating these rules. We get distracted running our businesses, serving customers, and forget to sign the form waiving the annual shareholder meeting or we never raise the initial capital we needed to get the business on the right track from the start. Does this mean you’re automatically liable if someone sues your company?

Fortunately, the answer is no. It means you need to speak with a business lawyer soon, someone who understands the rules for the states where you do business. Ideally, you’re making that call before you get sued, because its much easier and cheaper to have a business lawyer help you follow the rules correctly in the first place, rather than defend you after something has gone wrong.

If you’re at that point where something has already gone wrong, and your being sued personally, you need to get help quickly. The right commercial lawyer might be able to explain to a judge why your circumstances make your case different from the general rules.

For more information about your specific needs, contact the business law firm of Danziger Shapiro, P.C. at (215) 545-4830.