A corporation in New Jersey must follow certain formalities in its formation and operation to maintain its status as a corporation with respect to protecting its shareholders from personal liability.
Protection Of A Corporation’s Shareholders From Individual Liability
In New Jersey, shareholders generally are not liable for claims against the corporation for amounts greater than their investment in the corporation. N.J.S.A. § 14A:5-30(2) states: “Unless otherwise provided in the articles of incorporation, a shareholder of a corporation is not personally liable for the acts of the corporation, except that a shareholder may become personally liable by the reason of his own acts or conduct.”
Indeed, the New Jersey Supreme Court has recognized “that a primary reason for incorporation is the insulation of shareholders from the liabilities of the corporate enterprise.” State Dep’t of Envtl. Prot. v. Ventron, 468 A.2d 150, 94 N.J. 473, 500 (N.J. 1983). This separation of a corporation from the individual assets of its shareholders is termed a “corporate veil.”
Piercing Of The Corporate Veil
However, shareholders may still be held personally liable (that is, the corporate veil may be pierced) if (i) a statute — such as the New Jersey Consumer Fraud Act, which this author has discussed here — imposes such personal liability, (ii) the corporation is “used to defeat the ends of justice, to perpetrate fraud, to accomplish a crime, or otherwise to evade the law,” Ventron, 94 N.J. at 500, (iii) the shareholder uses a position of power to commit a tort directly or to breach a duty to other shareholders, or (iv) the corporation fails to follow certain formalities in its formation and operation, see Yacker v. Weiner, 263 A.2d 188, 109 N.J. 351, 360 (N.J. Super. Ct. Ch. Div. 1970), aff’d, 114 N.J. Super. 526 (N.J. App. Div. 1971).
How To Prevent Piercing Of The Corporate Veil
Among the corporate formalities which the shareholders of a corporation may need to observe in order to protect themselves from personal liability are the following:
- Hold meetings and maintain minutes.
- Act through officers who function in their proper corporate capacities.
- Segregate corporate assets from personal assets and assets of other corporations.
- File annual reports with the Office of the Treasurer of the State of New Jersey. See N.J.S.A. § 14A:4-5(1).
- Appropriately capitalize the business. That is, make certain that the corporation has monies sufficient to pay its obligations. See OTR Assocs. v. IBC Servs., 801 A.2d 407, 408-411, 353 N.J. Super. 48 (N.J. App. Div. 2002).
- Make evident to people who do business with the corporation that it is the corporation, not the shareholders or a parent corporation, that is operating the business. See OTR Assocs., 801 A.2d 407, 408-411. Thus, for example, the corporation’s letterhead, business cards, and business signs should include the word “corporation,” “company,” “incorporated,” an abbreviation of one of these words, or “Ltd.,” as the case may be. See N.J.S.A. § 14A:2-2(1), 14A:2-2(1)(d). So, too, those who manage the entity should sign all agreements and documents in a corporate capacity indicating their corporate positions.
Failure to abide by these corporate formalities can result in shareholders, parent corporations, or affiliated corporations being held liable for the corporation’s debts and obligations.
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.