Business Owner Limited Liability Protection

There are many business formations in New Jersey that offer limited liability protection to its owners. However, this protection is not absolute and needs to be protected at all times. It is important for business owners to recognize actions that could “pierce the corporate veil” of liability protection normally enjoyed by the owners.

Corporations and Limited Liability Companies (LLC) are considered separate entities from their shareholders or members respectively. Normally the effect of running a business through a corporation or LLC is to limit the liability of the owners only to what they originally invested in the business. The owners and managers are normally not personally liable for the debts or tort liabilities of the business. Torts are legal wrongs committed against someone that are civil in nature rather than criminal. If your corporation or LLC is sued by someone for a civil wrong and a judgment is awarded against the business, the plaintiffs are normally not able to go after the personal assets of the owners or managers.

Under certain circumstances courts are willing to ignore the protection normally afforded to owners and managers of corporations and LLCs. As a result this will make the owners and managers personally liable for debts and civil liability incurred by the corporation or LLC. This means that creditors and plaintiffs awarded judgments against a business are able to go after the owners and managers of the business.

Factors that Pierce the Corporate Veil

Personal liability is imposed through the corporate veil when there is no real separation between a business and its owners, the company’s actions were fraudulent, and creditors or plaintiff’s suffered an unjust lost. Courts look to see if the owners and managers followed the formal requirements of operating a corporation to determine if there is real separation between the owners and the entity itself. Courts also look for evidence that the business is merely operating as an “alter ego” for the individual owner.

Fraudulent behavior on the part of the corporation is considered by the court to determine if piercing the corporate veil is justified. If owners are using the business to shield themselves from liability for fraud, that can be a justification for the loss of limited liability. Additionally, if as a result of the fraud and lack of separation of the business from its owners creditors suffer an unjust loss, courts will consider that when deciding whether or not to ignore the traditional limited liability protection of the owners.

Help with Business Law in NJ

As a result of the factors considered by the courts when deciding to ignore limited liability and make owners personally liable, it is much easier for limited liability to be waived for smaller, closely held businesses. As a result it is of utmost importance to comply with all the requirements of running a limited liability business. Your local Burlington County business attorney can assist you with ensuring your business meets all applicable requirements and minimizes the chance that the corporate veil will be pierced.

CategoryLitigation