Are You The "Alter Ego" Of Your New York Corporation?

Don’t Be the “Alter Ego” of Your New York Corporation

Limited liability is one of the greatest advantages of establishing a corporation or limited liability corporation (LLC) because it shields New York business owners from personal liability for business debts. However, limited liability is not unconditional.

Therefore, start-ups and other New York businesses should be aware that there are circumstances under which courts will hold an LLC or corporation’s owners, members, and shareholders personally liable for business debts by “piercing the corporate veil.” Liability typically arises when a plaintiff claims that an LLC or corporation is not a distinct entity, but rather an “alter-ego” being used by the owners, members, and/or shareholders to advance their own personal interests or perpetrate a fraud.

To ensure you don’t end up in this situation, here are a few guidelines to keep in mind:

• Comply with formal rules for forming and maintaining a New York corporation or LLC.
• Maintain a separate bank account for your company.
• Don’t commingle personal assets with those of your business.
• Don’t divert any business assets for personal use.
• Make a reasonable initial investment in your business so that it is adequately capitalized.
• Don’t personally guarantee payment of debts of your business.
• Don’t use your company to engage in illegal, fraudulent, or reckless acts.
• Clearly show that you are operating a corporation or LLC by identifying the company status on business materials, such as letterhead and invoices.
• Create and use a company email address for all company business; not your personal email.
• When signing company documents, clearly state that you are signing on behalf of your business by indicating the name of the company as well as your title.

This is certainly not an exhaustive list, and courts make a detailed analysis before deciding whether to impose personal liability on the company’s principals.

If a court pierces the corporate veil, the company’s owners, members, and/or shareholders can be held personally responsible for the company’s liabilities. This means your personal assets, such as your bank account, your car and even your home, then become accessible to creditors and others seeking relief. If you are concerned about your potential liability for the debts of your business, it is always a good idea to consult with an experienced business attorney.

One final point: do not dissolve your corporation during a lawsuit. There are a number of decisions holding shareholders liable for corporate obligations solely because they chose to dissolve their corporation during litigation against the company.

Do you have any questions? Would you like to discuss the matter further? If so, please contact me, Dan Brecher, at 201-806-3364.