One of the primary reasons for forming a corporation or limited liability company is to shield the business owners and managers from personal liability. The general rule is that a corporation’s officers and shareholders and an LLC’s managers and members cannot be held personally liable when something goes wrong in the business. Instead, liability is limited to the insurance and assets of the company. However, in Pennsylvania, there are two exceptions: “Veil-Piercing” and “Participation Theory.”
The immunity that owners and managers of corporations and LLCs enjoy is also referred to as a “veil.” Just as a veil covers a bride’s face as she walks down the aisle, a veil protects the assets of an owner or manager when something goes wrong in a corporation or LLC. Nevertheless, this veil can be pierced and the asset protection eliminated under certain circumstances. In Pennsylvania, veil-piercing can happen if the company has disregarded the formal rules for operating the business and/or has regularly intermingled money and business dealings of the individual and company. A few examples would include the following: failing to appoint officers, failing to have required meetings, paying personal assets with the company’s money, or transferring company property to the owners without payment. In these circumstances, if the court believes that the formal obligations of running the company are being ignored or that the company is a mere sham, the veil can be pierced and the owners and officers can be held personally responsible for corporate liabilities.
The Participation Theory provides that, despite the existence of a legitimate corporation, an officer or shareholder can still be held liable for personally participating in wrongful conduct. For example, if a corporate shareholder caused a car accident while working for the company, both the corporation and the shareholder would be jointly liable because the shareholder participated in the car crash. Similarly, if the corporate officer embezzled money from the customers of a corporation, both the shareholder and the corporation would be liable. The courts have held that “participation” must involve active conduct and that a mere failure to properly direct or supervise the other corporate officers or employees will not create personal liability. So, a corporation CEO’s failure to uncover a wrongful act, like sexual harassment, being committed by another employee would not result in personal liability of the CEO to the harassment victim. Although the issue has not reached the Pennsylvania Supreme Court yet, it is generally believed that the same rules regarding Participation Theory governing corporations will apply to managers and members of LLCs.
Bottom line: To prevent being personally liable for wrongful acts in a corporation or LLC, abide by the rules regarding proper organization and operation of the company, keep the company’s financial matters separate from your personal finances, and do not participate in any wrongdoing.
Tim Rayne is a partner in the full-service law firm of MacElree Harvey, Ltd. which has 29 attorneys in offices located in Kennett Square and West Chester, and Centreville, Del. Tim focuses his law practice in personal injury and civil litigation law, primarily helping people who have been injured in accidents deal with insurance companies. Tim can be reached at 610.840.0124 or firstname.lastname@example.org. For more News and Information on personal Injury law, check out Tim’s website at www.macelree.com/timrayne.