Courts also ignore the form where necessary to prevent fraud, illegality, injustice, or a contravention of public policy. Business owners may be forced to shoulder the liabilities of their entity in other situations as well.
Some of these are:
1. Individual liability under the Fair Labor Standards Act, the Pennsylvania Human Relations Act, ERISA and the Wage Payment and Collection Law. Under certain situations, these statutes impose liability on corporate officers and LLC members for the entity’s violation of their terms and may impose the financial obligation of the entity upon the owners. For example, the Wage Payment and Collection Law makes corporate officers personally responsible for violations of the act, including payment of wages found to be due.
2. Trustee Ex Maleficio Virtually all entities that have employees collect state or federal income taxes in the form of wages withheld from employees’ paychecks. Some entities also collect sales taxes. Withheld income taxes and sales taxes are held in trust for the relevant taxing authority and are to be remitted to that taxing authority on a timely basis. Those responsible for the performance of this duty are personally responsible if the entity fails to do so. Courts employ a multi-factorial test to identify the responsible individuals, but the general concept is that an employee or officer who has the power to direct payment of the entity’s funds can be held personally responsible to pay if the entity fails to remit withheld sales or income taxes to the relevant taxing authority.
3. Duties in Insolvency Most all corporate directors know that they owe two core duties to the corporation and its shareholders – a duty of care and a duty of loyalty. The duty of care requires a director to use the same degree of care that an ordinarily careful and prudent person uses in similar circumstances. It requires that directors reasonably inform themselves, before making a decision, of all relevant information and alternatives. The duty of loyalty requires the directors to act in good faith for the benefit of the corporation and its stockholders. What is not as well known is that when the entity is insolvent, those duties are no longer owed only to the shareholders. Instead the shareholders’ interests become subordinate to those of the entity’s creditors. Failure to faithfully discharge these duties now renders the directors personally liable to the entity’s creditors.
4. Voidable Transfers A creature of statute, a voidable transfer can be one of two types: a transfer made with actual intent to hinder, delay or defraud a creditor of the entity; or, a transfer made without receiving reasonably equivalent value in exchange at a time when the entity is insolvent. Declaring a transfer voidable results in the asset transferred being “clawed back” into the hands of the entity. The risk is born by the transferee of the asset in question – often an owner of the entity.
The shield of limited liability is a valuable feature of the corporate and limited liability company form as it protects the owners of the entity from liability for its obligations, effectively limiting that liability to the owner’s investment in the entity. However that shield can be lost where owners deliberately or unwittingly conduct the business of the entity in an unlawful manner. Business owners are well advised to take care to manage their entity so as to maintain the limited liability shield. The corporate and litigation departments of Antheil Maslow & MacMinn, LLP can provide valuable counsel to business owners facing these questions and, if necessary, provide effective legal representation in litigation of these claims.