Do Not Expose Yourself to Personal Liability With Your NJ Corporation
THE FEAR OF "PIERCING THE CORPORATE VEIL" IN NEW JERSEY
Sometimes, courts will allow plaintiffs to receive compensation from corporate officers, directors, or shareholders for damages rather than limiting recovery to corporate resources. Personal immunity from legal liability is the usual corporate protection, but personal liability may be imposed in a variety of situations. Plaintiffs seek to "pierce the corporate veil” when they are looking for individual liability in business disputes. The specific criteria for piercing the corporate veil varies and may include the following:
If a corporation is indistinguishable from its owners in practical terms, courts will not allow owners to benefit from limited liability.
Example: Bill's Lawn Service, Inc. and Bill, individually share the same banking account. Bill signs contracts in his own name. Bill may be liable for breaching a business contract in NJ because he and his corporation are legally indistinct.
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If a corporation is formed for fraudulent purposes, courts will allow personal recourse against the owners. If a business fails to follow corporate formalities in areas such as record-keeping and decision-making procedures, a court may impose liability on the individuals controlling the business.
The potential for personal liability encourages corporations in NJ to observe legal requirements and to avoid damage to third parties.
NEW JERSEY BUSINESS LITIGATION
In New Jersey, a corporation is treated as an entity wholly separate and distinct from the individuals who compose and control it. However, in some instances New Jersey courts will ignore the corporate identity, pierce the corporate veil and hold a corporate principal/owner personally liable. In finding a corporate owner/officer liable, a plaintiff must prove that individual liability is legally permissible and show the amount of damages chargeable to the individuals. Two factors must be present to pierce the corporate veil and expose corporate representatives personally liable: 1) there must be a very close unity of interest between the corporation and its owners that separate personalities in reality do not exist, and 2) a fraud or injustice will result.
The Federal Courts in New Jersey when applying New Jersey Law have found that corporate protections may be ignored by the following factors: 1) gross undercapitalization; 2) failure to observe corporate formalities; 3) nonpayment of dividends; 4) insolvency of the debtor corporation; 5) siphoning of corporate funds by the dominant shareholder(s); 6) Absence of a functioning Board of Directors or corporate officers; 7) absence of corporate records; and 8) the fact that the corporation merely is a façade for the personal operations of the dominant stockholders. Personal liability of officers and directors generally will be imposed only when the corporation has abused the protections of incorporation by using the corporate shield to perpetuate a fraud or injustice or otherwise to circumvent the law. There must be some wrongdoing or impropriety on the part of the corporation or stockholders before the corporate veil will be pierced. Our courts have consistently recognized that a “primary reason for use of the corporate form is to limit the liability of the shareholders,” and therefore using the corporate form for that purpose does not constitute fraud. The party seeking to pierce the corporate veil carries the heavy burden of proving that the corporation has abused the privilege of incorporation by operating itself in some significant manner to perpetuate a fraud or injustice.
Let us help you with NJ corporation law advice to reduce the
threat of personal liability. Contact Fredrick P. Niemann, Esq. toll-free
at (855) 375-5291 or email him at fniemann@hnlawfirm.com.
Fredrick P. Niemann, Esq.,
a NJ Corporation Attorney
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NJ Corporate Law Attorney serving these New Jersey Counties:
Monmouth County, Ocean County, Essex County, Cape May County, Camden
County, Mercer County, Middlesex County, Bergen County, Morris County,
Burlington County, Union County, Somerset County, Hudson County, Passaic County
NJ Corporation Law Attorney | Incorporation in NJ | NJ Corporation
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