Keep Corporate Debt Separate from Personal Debt
Originally published: 06.01.12 by Mike Coyne
Otherwise, you could find yourself liable for business bills.
Some time ago, we wrote about the importance of following corporate formalities in order to avoid incurring personal liability for corporate debts. As a general rule, an officer or a shareholder of a corporation is not liable for corporate obligations, because the corporation is considered a separate legal entity. However, there are times when a court will “pierce the corporate veil” and find personal liability for corporate obligations. Courts frequently take this approach when a corporation exists in name only and the officers or owners are using the corporate form to defraud or otherwise take advantage of customers.
If you are operating your business in corporate form, it is important to follow formalities. You should sign contracts in your capacity as an officer, and contracts should always be between your corporation and the other party. You should never be named as a party to the contract.
We are presently working with a client who did not follow this advice and is now on the line for significant corporate debt.
Our client was the treasurer of a small family business. Ironically, he was the only non-family member involved in management, and he was not a share- holder. A fan of frequent flyer miles, our client devised what he thought would be a very clever scheme for acquiring free airline tickets. Rather than order and pay for supplies through normal channels, he began ordering supplies for the corporation on his personal credit card and then having the corporation reimburse him.
As luck would have it, he had a falling out with family members and was summarily terminated prior to being reimbursed for over $120,000 of sup- plies. The owners of the business were irritated that our client had initiated this plan without their knowledge or consent. Therefore, they have refused to reimburse him for the supplies.
The bank that issued the credit card is aggressively pursuing our client for payment. As far as it is concerned, it has no reason to contact the corporation for payment. It has no evidence that this was anything other than a personal purchase.
In all likelihood, this matter will be resolved sometime in the next several months, but not before our client incurs legal fees and substantial damage to his credit rating.
While these facts are a little unusual, it never makes sense to use a personal credit card or a personal line of credit to support your business. The whole point of incorporating is to segregate your business obligations from your personal obligations. You should be vigilant to maintain that separation.
Michael P. Coyne is a founding partner of the law firm, Waldheger Coyne, located in Cleveland, Ohio. For more information on the firm, visit: www.healthlaw.com or call 440-835-0600.