Personal Liability of Corporate Officers
Personal liability of corporate officers comes with being an officer of a corporation.3 min read
2. Independent Entity
3. Limited Liability
4. Fiduciary Duties
Personal liability of corporate officers comes with being an officer of a corporation. While you are able to serve as a strategic thinker, be looked upon as a visionary, and maintain a profitable venture, it can also be quite dramatic.
Many corporate officers face the temptations that come with corruption and end up as the subject of police investigations. Shareholder lawsuits are also quite prevalent, along with potentially harsh sentences. If you've ever known a corporate officer who feared personal liability, their concerns were well-founded.
One of the most important benefits of establishing a business as a corporation is to protect the officers and shareholders from personal liability for their actions on behalf of the corporation. Typically, a corporate officer isn't held personally liable, as long as his or her actions fall within the scope of their position and the parameters of the law.
An officer of a corporation may serve on the board of directors or fulfill a managerial role. A corporate officer may also be:
- A shareholder
- A regular employee
- An appointee to the board who is or isn't paid
- A person who serves in multiple capacities
An officer's personal liability for matters pertaining to the corporation will depend on the facts presented in the case, as well as the officer's official relationship to the corporation.
A corporation serves as an independent legal entity, formed under state law, and existing separately from shareholders. Once the articles of incorporation are filed with the state, the corporation enters legal existence and can do many of the same things that a person can do.
Once the state authorizes the corporation, it can buy and sell goods and services, it can own property, litigate in court, and pay income taxes, all in the name of the corporation. Of course, in reality, the officers are acting on behalf of the corporation while they manage its affairs.
One of the biggest protections for a corporation is its limited liability. Limited liability protects directors, employees, officers, and shareholders from personal liability for actions taken in the name of the corporation.
As such, neither a creditor nor an injured party can sue a corporate employee for their actions on behalf of the corporation. Let's say an officer of the corporation signs a loan document on behalf of the corporation and the corporation defaults on the loan. In this instance, the lender cannot sue the officer. They'd only be able to recover the loss from the company's assets.
Under what circumstances can a director or an officer be held liable? They'd have to take actions that were not authorized or negligent. For example, if a corporate officer gets into a car accident while driving the company, the other driver may not only sue the company, but also the corporate officer if he went through a red light.
This is why limited liability only applies to actions that were authorized by the company. Negligent actions are almost never considered within the scope of someone's employment. To prevent corporate officers from being held personally liable, corporations will take out insurance policies for its directors and officers in the hope that it will cover detrimental events that could expose an officer.
Illegal actions can also leave an officer personally liable, even those actions performed under the umbrella of the corporation. Examples include:
- Lying to the government
- Being complicit in lying to the public
- Stealing corporate resources
- Bilking investors
- Sexual harassment
If it's an illegal act, no corporation or insurance may protect the officer from facing civil or criminal penalties, including jail time.
Those who serve on the board of directors are duty bound to act in the best interest of the shareholders and maximize the company's profits. An officer receives protection under limited liability only when acting on behalf of the corporation. As soon as he or she breaches their duties and places their own interests ahead of corporate duties, they open themselves up to liability.
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