Piercing the Corporate Veil

Written by Instant E&O

Many service businesses are incorporated as a way to shield the assets of the shareholders from legal liability lawsuits arising from the services provided. Incorporation may take the form of Incorporated entities, Limited Liability corporations or partnerships or

One of the most important legal benefits of incorporation is the safeguarding of personal assets against the claims of creditors and lawsuits. Sole proprietors and general partners in a partnership are personally and jointly responsible for all the liabilities of a business such as loans, accounts payable, and legal judgments. In a corporation, however, stockholders, directors and officers typically are not liable for the company's debts and obligations. They are limited in liability to the amount they have invested in the corporation. For example, if a shareholder purchased $1000 in stock, no more than $1000 can be lost. Corporations may hold assets such as real estate, cars or boats. If a shareholder of a corporation is personally involved in a lawsuit or bankruptcy, these assets may be protected. A creditor of a shareholder of a corporation or LLC cannot seize the assets of the company. However, the creditor can seize ownership shares in the corporation, as they are considered a personal asset.

However in many common law jurisdictions legal liability protection for tortuous acts (civil wrongs) is restricted.

If you provide services to your clients that result in a loss and it can be proven that you acted negligently when providing these services, it is highly likely that a Court will “lift” the corporate veil and allow the injured party to sue you personally. This is especially true if you were the individual that performed or managed the services that gave rise to the loss, or that you personally contracted with the client to provide the services.

Additionally, regardless of whether you were directly involved in the provision of the services it is probably that as the owner of your business the plaintiff’s lawyers will name you personally in any suit papers. This means that even if you are not personally responsible for the actions that gave rise to the lawsuit, you will still incur substantial legal expenses defending yourself and seeking to be dismissed from any lawsuit.

There is a simple solution: the errors and omissions insurance for your business should be sufficiently comprehensive to provide protection, not only for the corporation, but also the directors, officers, owners, partners, members and employees and the corporation. This will provide you with protection for tort claims that might be able to pierce the corporate veil and provide individual defense costs coverage in the event the business owners are sued personally.

You should consult with local legal counsel to see if there are any exceptions or variations to this principle in your State; however, the best practice approach is to have the comprehensive errors and omissions coverage in place.

©Jorgensen & Company 2014. All rights reserved. No part of this document covered by the copyrights hereon may be reproduced, transmitted or copied in any form without written permission of Jorgensen & Company. This article is a publication of Jorgensen & Company. It not intended to represent the opinions of any insurer or provide legal or other professional advice.