A corporation in New York State should observe certain formalities in its formation and operation to keep its status as a corporation with regard to shielding its shareholders from individual liability.
Shielding of A Corporation’s Shareholders From Personal Liability
In New York State, shareholders generally may not be held personally liable for causes of action against the corporation.
Indeed, the New York Court of Appeals has recognized that “The law permits the incorporation of a business for the very purpose of enabling its proprietors to escape personal liability.” Walkovszky v. Carlton, 18 N.Y.2d 414, 417, 223 N.E.2d 6, 276 N.Y.S.2d 585 (N.Y. 1966). This separation of a corporation from the personal assets of its shareholders is called a “corporate veil.”
New York is probably the most difficult jurisdiction in which to pierce the corporate veil.
Piercing Of The Corporate Veil
Nonetheless, shareholders may still be held individually liable (in other words, the corporate veil may be pierced) where a statute imposes such personal liability. For example, section 630 of the New York Business Corporation Law renders every privately held corporation’s ten largest shareholders personally liable, jointly and severally, “for all debts, wages or salaries due and owing to any of [the corporation’s] . . . laborers, servants or employees other than contractors, for services performed by them for such corporation.” N.Y. Bus. Corp. Law § 630(a).
Further, shareholders may be found personally liable where the corporation “is employed to defraud creditors, to evade an existing obligation, to circumvent a statute, to achieve or perpetrate a monopoly, or to protect knavery or crime.” Maurice Wormser, Piercing the Veil of Corporate Entity, 12 Columbia L. Rev. 496, 517 (1912).
So, too, a parent corporation may be found liable where it “exercises control in everyday operations” over the subsidiary corporation, such that “the subsidiary corporation is a dummy for the parent corporation.” A.W. Fiur Co. v. Ataka & Co., 71 A.D.2d 370, 374, 422 N.Y.S.2d 419 (1st Dep’t 1979).
Again, shareholders may be held individually liable where the shareholders fail to observe certain corporate formalities.
How To Avoid Piercing Of The Corporate Veil
Some of the corporate formalities which the shareholders of a corporation may need to abide by in order to shield themselves from individual liability are these:
- Hold meetings and record corporate resolutions;
- Properly issue shares of the corporation;
- Keep corporate assets separate from personal assets;
- Keep books of account for the corporation;
- Do not use corporate funds to pay shareholders’ personal expenses;
- File corporate tax returns;
- Make clear to people who transact business with the corporation that it is the corporation, not the shareholders or a parent corporation, that is operating the business. See Application of Sbarro Holding, Inc., 111 Misc.2d 910, 910-915, 445 N.Y.S.2d 911 (N.Y. Sup. Ct. Kings County 1981), judgment aff’d, 91 A.D.2d 613, 456 N.Y.S.2d 416 (2d Dep’t 1982); Weisser v. Mursam Shoe Corp., 127 F.2d 344, 345-346, 348-349 (2d Cir. 1942). For instance, the company’s stationery, business cards, and business signs should contain the word “corporation,” “incorporated,” “limited,” or an abbreviation of one of those words, as applicable. See N.Y. Bus. Corp. Law § 301(a)(1). Likewise, those who operate the entity should execute all documents and contracts in a corporate capacity indicating their corporate titles.
Neglecting to observe these corporate formalities may result in shareholders, parent companies, or affiliated companies being held liable for the corporation’s obligations and debts.
The courts of many jurisdictions will pierce the corporate veil because the shareholders have failed appropriately to capitalize the business. That is, the courts of many states will find shareholders personally liable for the corporation’s debts and obligations where the shareholders have failed to ensure that the corporation has funds sufficient to pay those debts and obligations. By contrast, in New York, shareholders’ under-capitalization of a corporation’s business, standing alone, is not sufficient to render the shareholders personally liable. See Walkovszky v. Carlton, 18 N.Y.2d 414, 419, 223 N.E.2d 6, 276 N.Y.S.2d 585 (N.Y. 1966).
If your company wants to bring, or needs a lawyer to defend it in, business litigation and you are located in the New York City area, call Attorney David S. Rich at (212) 209-3972.