When the Corporate Entity does not Protect Against Personal Liability

Victor Look, Esq. is a partner at Look Law. In this video he discusses instances in which the corporate entity does not protect against personal liability.

  1. Alter ego
  2. Inadequate capitalization
  3. Avoidance of fraud

There are instances where even if you are in full compliance with the statutory requirements for forming the corporate entity or you know, a business entity, these entities will still not protect you against personal liability, that in the first instance, it’s called an alter ego.

If a stake holder chooses to disregard all corporate formalities or to treat corporate assets as if it were their individual personal assets, the court can disregard the corporate and pierce the corporate vale.

In the second instance, if you don’t adequately capitalize your business from the time of formation, you may have that corporate entity disregarded. For instance, if you only fund your corporate entity or your business entity with $50,000 but you take out short term loans of $2 million, and have to default – if the business entity defaults on it, guess what? The court may disregard the corporate entity and place personal liability on you for those loans.

And the third instance is for the avoidance of fraud. If you use your business entity to engage in fraud, then the court will probably disregard the corporate entity and place personal liability on you for any injury that you caused. And an extreme example of this would be Bernie Madoff. He used his company to defraud billions of dollars from many people and the court is saying, guess what? Too bad, you’re personally liable.

So my advice to you is to not engage in these types of behavior if you want to have your corporate entity shield you from personal liability.