Corporate Liability Protection: Limitations To Incorporating

Monday, February 13, 2012
As magical or complicated as it may seem, incorporating is essentially a form of protection for the owners of a corporation from the everyday operations of a business. Knowing how incorporating can help protect the owners of a business is very important. There are certain situations where directors and officers of a corporation are held personally liable for corporate activities. The following points will cover and explain the limits of corporate liability protection.

1. One very important component to keep in mind is that corporations cannot protect you from your own wrong doing. Whether the corporate officer participates in or authorizes a wrong, they are liable even if the corporation is also at fault. That being said, corporate officers and/or directors are not responsible for corporate activities that they did not participate in.


-Frances T. v. Village Green Owners Association: Ordered a resident of a property to detach exterior lighting that was installed to protect the resident from further criminal activity after a rape that occurred in the unit.

-PMC, Inc. v. Kadisha: Stole trade secrets from a former employer.

-Michaelis v. Benavides: President and majority shareholder of cement subcontractor responsible for substandard construction after being in charge and making all decisions focused around that job.

2. Never ever fail to remit federal withholding taxes to the IRS. Withholding income taxes and FICA taxes from employee salaries and hold them in trust for the government is a requirement for employers. So, even if the bills are piling up, do NOT use those trust funds to pay off your expenses because the responsible financial officer of a corporation can be responsible for withholding taxes, according to Federal statutes. The "responsible officer" of finances is the person who is in charge of the corporation's financial affairs, such as having control over decision making over the corporation's tax matters. They are responsible for failing to pay withholding taxes and will be penalized for not paying the required federal taxes.

3. In California, an officer, major stockholder, or someone who is in control of a corporation's affairs and deliberately fails to pay the required contributions to the State Unemployment Fund could be personally responsible for paying those contributions plus penalties and interest that have accumulated. The main point is that the state and federal taxes that are withheld from employee's salaries are not to be used to pay other bills and expenses.

4. You will not be protected if you damage the environment. According to CERLA (the environmental "superfund") corporate officers who are in charge of the disposal of hazardous wastes can be held liable as "owners and operators" of any corporate facility. Under CERLA, those directors and officers that actively participate in management or operation of a company can be held responsible without piercing the corporate veil.


-US v. Carolina Transformer: The corporate officers were responsible for $1 million and punitive damages due to failure to comply with EPA order to clean up fluids that leaked into the soil.

5. The officers of a corporate are responsible for wage claims in many states. In California, there is some controversy surrounding this (see, Bradstreet v. Wong), for the most part Cal. Lab Code Sec. 558 (a) discusses that the employer, or person acting on behalf of that role, is responsible for unpaid wages. New York's take on this rule can be viewed in "Why in the World Would Anyone Incorporate in New York."

An important component of running a business is to use a corporation to limit the accountability of a business owner. Even though corporate directors and officers don't have to experience personal responsibility for wrongdoings of a corporation, they will be held liable if they partake in or authorize those wrongdoings. Furthermore, corporate officers should note that statutes have been passed that limit personal protection in regards to taxes, damage to the environment, and certain wage claims.


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