Corporations

LESSONS IN LIABILITY – Shareholder Liability

This is the second article in Legalstandard.com’s new series entitled “LESSONS IN LIABLITY – HOW FLORIDA BUSINESSES CAN AVOID COSTLY LAWSUITS.” LegalStandard.com’s LESSONS IN LIABILITY series is designed to promote LegalStandard.com’s goal of keeping its clients “in compliance and out of the courtroom.” This article will discuss potential liability to shareholders of Florida corporations. Generally, under Florida law, shareholders have no liability to the corporation, its employees, or its creditors. Obviously, this is the major reason why Florida small business owners incorporate their businesses. However, this protection is not absolute and is often misunderstood by shareholders of Florida’s closely-held corporations. For example, a very common pitfall is personal liability through a personal guaranty signed in connection with a corporation’s account vendor, franchisor or a commercial lease. Additionally, shareholders may be personally liable for certain torts and statutory violations. This article will examine a few of these sources of potential personal liability. PIERCING THE CORPORATE VEIL Shareholders of Florida corporations should be aware that Florida courts recognize a legal doctrine called “piercing the corporate veil.” Under this common law doctrine, Florida courts will disregard the corporate form and impute the liabilities of the corporation as liabilities of the shareholder. While Florida courts are generally reluctant to pierce the corporate veil, some Florida courts have allowed a corporation’s creditor to pierce the corporation veil and tax the corporation’s shareholders with personal responsibly for the corporation’s debts. Notably, creditors have successfully pierced the corporate veil when the creditor has been able to prove the shareholder has used the corporate form for an “improper purpose.” See Jai-Alai Palace, Inc. v. Sykes, 450 So. 2d 1114 (Fla. 1984). More specifically, if a creditor can prove the following bad faith elements, the shareholder may be personally liable for the corporation’s debts: (1) the shareholder dominated and

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