Business owners form corporations, limited partnerships and limited liability companies to protect their personal assets from debts, claims and liabilities that can arise out of any business. Although the liability protection afforded by corporations, LPs and LLCs is real and worthwhile, it is far from absolute, and there are numerous exceptions.
Sometimes creditors attempt to “pierce the corporate veil” which is the subject of other blogs on this site which can be found here and here. In addition, representatives of an organization are potentially liable for acts or omissions in which they personally participate as representatives of the organization, under the so-called “participation theory” of liability.
Owners who receive distributions when the organization is insolvent or that render the organization insolvent, or who receive distributions in liquidation of the organization rendering it unable to pay valid claims, may be required to account for and disgorge funds distributed.
There are various state and federal laws that specifically impose liability for certain categories of claims. These include liability for unpaid wages under the Pennsylvania Wage Payment and Collection Law, and liability for “trust fund” taxes, which are taxes that the organization withholds from others and is required to pay over to federal, state or local taxing authorities, such as sales taxes and income, social security and Medicare taxes.
Observing corporate formalities, ensuring that the organization is adequately capitalized, and engaging in sound business entity housekeeping practices can and will bolster the liability protection the law affords. In addition, however, to avoid unexpected personal liability that can arise when a troubled business cannot pay all of its obligations, the owners and the officers are well advised to ensure that the types of claims for which personal liability can be asserted by law are paid in preference to other obligations for which personal liability is not present.
For more information, contact William J. Burke, III.