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 controlled the corporation to such an extent that the corporation’s independent existence, was in fact non-existent and the shareholders were in fact alter egos of the corporation;
(2) the corporate form must have been used fraudulently or for an improper purpose; and
(3) the fraudulent or improper use of the corporate form caused injury to the claimant.
See Gasparini v. Pordomingo, 972 So.2d 1053 (Fla. 3d DCA 2008).
LIABILITY TO CREDITORS
Further, shareholders that serve as a director and/or officer (i.e., president, vice-president, etc.) of a closely-held corporation may have personal liability to the corporation’s creditors when the corporation is insolvent. Under Florida law, a corporation is insolvent when it is unable to pay its debts as they come due in the ordinary course of its business. See Florida Statute § 607.01401(16). When the corporation is insolvent, the directors and officers of the insolvent corporation owe a fiduciary duty to the corporation’s creditors. A breach of that fiduciary duty to the detriment of the creditor could result in personal liability to the shareholder.
Additionally, a number of Florida statutes create may create personal liability to shareholders of Florida corporations. For example, shareholders may be personally liable for violating certain provisions of Florida’s Workers’ Compensation Statute, Chapter 440. Specifically, a business’ failure to properly secure workers compensation coverage may result in personal liability to the corporation’s shareholders for personal injuries to employees.
Finally, in most tort situations, an individual will be liable for his or her own actions regardless of his or her relationship to the corporation. For example, a shareholder will still be liable for damages resulting from a motor vehicle accident if the shareholder was negligent, even if the accident occurred while working for the corporation. Hence, the concept of limited liability for shareholders is mainly applicable to situations in which a corporation may be vicariously liable for the acts of its officers, employees, or agents.
The main overarching point is that Florida corporations offer an excellent source of protection to shareholders, and prospective business owners should absolutely consider incorporation in Florida. Nevertheless, the protection of the corporate veil is not absolute, and shareholders of Florida corporations should be aware of these limited circumstances when they may be personally responsible. By maintaining proper insurance (e.g. workers compensation insurance), acting in good faith, and maintaining the corporate form through current and accurate books and records, shareholders of Florida corporation can mitigate the risk of personal liability in these limited circumstances.
To keep you in compliance and out of the courtroom, LegalStandard.com offers a number of products and consultations services designed to protect your corporation’s shareholders from personal liability. Please call us at (800) 670-8051 to learn more.