Piercing the Corporate Veil – Liability of Owners and Officers for Corporate Acts in Colorado
Piercing the corporate veil is when a court reaches through a business entity and finds the owners, officers or employees liable for actions taken by the business. Business owners and officers want to know whether they are personally liable for business liabilities. The answer depends upon the facts and circumstances of each situation.
There are two basic business structures. One is an individual (sole proprietorship) or group of individuals (general partnership) operating as a business. The other is a business entity with limited liability for business affairs. Examples of business entities would be corporations and limited liability companies. As a general rule, operating as a sole proprietor or general partnership exposes the owners to liability for all business liabilities. Operating as a corporation or limited liability company is supposed to shield owners and officers from business liabilities.
The lure of no personal liability for the actions and debts of the business makes corporations and limited liability companies the natural choice. However, that shield from business liabilities is a bit of an illusion. There are numerous ways that the corporate veil can be pierced and a business owner or officer found liable for business affairs.
Identifying all scenarios where an owner or officer could be found personally liable is impossible. However, there are two common themes when courts pierce the corporate veil. Those themes are personal involvement and personal misconduct.
Personal involvement means that the owner or officer’s actions somehow caused the liability. For example, a business owner driving a company car runs a red light causing an accident. As the individual who caused the accident, the driver is liable for the damage. The corporation or limited liability company legal structure will not protect the driver from that personal liability.
The other common theme is misconduct. The car driver who runs the red light has committed misconduct, but that is not the type of misconduct I mean. Sometimes, corporations and companies will be created specifically because the business affairs being considered are likely to injure another person. The owner creates the structure specifically to shield himself from the wrongful conduct, or in the course of business the well-meaning owner engages in misconduct. In those situations, the law tries to pierce the corporate veil and hold the individuals who engaged in misconduct personally liable.
Misconduct is not necessarily something sinister. Misconduct is simply something society has defined as conduct to be deterred. For example, corporate officers can be held personally liable for violations of the Colorado Consumer Protection Act. A false or misleading statement in an ad or sales presentation can result in personal liability. In the corporate officer’s opinion, the statement may be nothing more than salesmanship. In the eyes of the law, however, it may be individual conduct to be deterred.
Piercing the corporate veil can be relatively easy when there is a specific law creating liability on the part of business owners, officers or employees. However, piercing the corporate veil can be quite difficult when there is not. Courts are well aware of legal tactics designed to pierce the corporate veil and can be quite skeptical when the dispute is about a business relationship knowingly entered into with a limited liability entity. Limited liability entities are still the preferred legal structure avoid personal liability for business acts. However, this legal structure is not complete protection.
