I've written previously about North Carolina Limited Liability Companies, a form of entity which, I believe, offer greater ease of use than corporations and which appear, according to case law, to offer better liability protection than corporations. My theory is getting ready to be put to the test!
I've been hired to represent a member/manager of a three-man LLC. Mr. X had been the silent partner in a Limited Liability Company set up to build spec houses in a subdivision Mr. X owned. He put up some land and some money, but otherwise stayed out of the day to day operations of the business.
The LLC, due to apparent mismanagement by other managers and their employees, collapsed, and in the process, left owing numerous bills and unhappy customers, who had already paid the company down payments to purchase spec houses. One unhappy customer, who has allegedly lost a sizeable down payment, has now sued not only the company, but the company's three owners, alleging breach of contract, breach of fiduciary duty, and fraud--among other things. During the discovery process that we're now in, what has quickly come to light is that Ms. Plaintiff has had no dealings whatsoever with Mr. X, and admittedly only dealt with one member of the company, and some of the company's employees.
Ms. Plaintiff's lawyer is proceeding under the theory that if one member of the company has defrauded Ms. Plaintiff, then he is entitled to pierce the corporate veil to reach out and get all owners/members of the company.
If this were a corporation, I'd likely agree. If it were found that the corporation's owners had not followed formalities (see the previous blog entry), and that fraud had been committed, I think a judge would not dismiss the action against the corporation's owners.
Under North Carolina's limited liability company law, however, I tend to disagree. North Carolina's law has held that members are not liable for the acts of the company--regardless of any corporate formalities--unless the specific member actually committed the act. In other words, a member who stole $10,000 from a customer cannot hide behind the LLC's shield; however, a member of an LLC whose employee stole $10,000 could hide behind the LLC's shield.
Many cases, thankfully, resolve themselves or settle before a trial. However, if this one does not, it will be an interesting case for a motion to dismiss and, failing that, an appeal to the Court of Appeal to help set precedent.
Sabtu, 20 Januari 2007
Senin, 01 Januari 2007
Corporations: Start the New Year off right!
If you own a small corporation (i.e. you're the sole owner, or your corporation is privately held), mark this week down as a time to hold your annual meeting.
Many small business owners set up a corporation to create a liability shield personally from business activities; however, setting up the corporation is only half the process. Each year, you should hold a corporate meeting to elect new officers, board members, and, ostensibly conduct annual corporate business.
For a small business owner, it might seem silly to go throught the formalities of a corporate meeting; however, the consequences of failing to do so might not be funny. As you know, the main purpose of setting up a corporation is to shield the owner's personal assets from liability arising out of the company's business activities. But that protection will do you no good if a Plaintiff's lawyer is able to "pierce the corporate veil" of your company. Simply put, if you run the corporation as nothing more than an extension of yourself, you might be able to be sued individually for the acts of your corporation.
Before piercing a corporate veil, the Courts look at whether the owner simply disregarded the corporate entity--for example, by mixing personal and corporate funds and, most importantly, by failing to follow the corporate formalities (such as, holding an annual meeting).
As you can see, for the purposes of an annual meeting, the substance of the meeting is much less important than simply having one. How, then, should you conduct your annual meeting?
First, understand that it's not necessary that the annual meeting be live. In other words, you could prepare a printed set of meeting minutes, which are signed off on by all the shareholders, owners and officers of the corporation, without having actually attended a real physical meeting in person. Actually, this is the standard mode of annual meetings for small, closely-held corporations.
How, then, should you conduct your annual meeting? First, if you have not done so, buy a corporate minutes book. Most likely, if you incorporated using an attorney, you have one of these. If not, you can find these for sale on the internet.
Second, mark on your business calendar some time in January to hold (at least on paper) an annual meeting. Your corporate bylaws have probably stated somewhere therein the annual date and time of the meeting.
Third, draw up--or have your attorney draw up--a pre-printed set of annual meetings that you can use year after year. In each annual meeting of shareholders, there should be blanks in which you elect directors. In each annual meeting of directors, there should be blanks in which you elect officers. It doesn't matter that your directors, officers and shareholders stay the same each year. What is important, however, is that you hold the meetings.
If you incorporated through some sort of office supply store or internet forms, this might sound foreign to you. Unfortunately, these outfits often show you only how to incorporate (i.e., file the articles of incorporation). But if they've not created a corporate internal structure (such as bylaws, and annual meetings), your corporations is next to useless in the face of a lawsuit.
If you need help with annual meetings or any other corporate advice, please contact me at wldeaton@vnet.net.
Many small business owners set up a corporation to create a liability shield personally from business activities; however, setting up the corporation is only half the process. Each year, you should hold a corporate meeting to elect new officers, board members, and, ostensibly conduct annual corporate business.
For a small business owner, it might seem silly to go throught the formalities of a corporate meeting; however, the consequences of failing to do so might not be funny. As you know, the main purpose of setting up a corporation is to shield the owner's personal assets from liability arising out of the company's business activities. But that protection will do you no good if a Plaintiff's lawyer is able to "pierce the corporate veil" of your company. Simply put, if you run the corporation as nothing more than an extension of yourself, you might be able to be sued individually for the acts of your corporation.
Before piercing a corporate veil, the Courts look at whether the owner simply disregarded the corporate entity--for example, by mixing personal and corporate funds and, most importantly, by failing to follow the corporate formalities (such as, holding an annual meeting).
As you can see, for the purposes of an annual meeting, the substance of the meeting is much less important than simply having one. How, then, should you conduct your annual meeting?
First, understand that it's not necessary that the annual meeting be live. In other words, you could prepare a printed set of meeting minutes, which are signed off on by all the shareholders, owners and officers of the corporation, without having actually attended a real physical meeting in person. Actually, this is the standard mode of annual meetings for small, closely-held corporations.
How, then, should you conduct your annual meeting? First, if you have not done so, buy a corporate minutes book. Most likely, if you incorporated using an attorney, you have one of these. If not, you can find these for sale on the internet.
Second, mark on your business calendar some time in January to hold (at least on paper) an annual meeting. Your corporate bylaws have probably stated somewhere therein the annual date and time of the meeting.
Third, draw up--or have your attorney draw up--a pre-printed set of annual meetings that you can use year after year. In each annual meeting of shareholders, there should be blanks in which you elect directors. In each annual meeting of directors, there should be blanks in which you elect officers. It doesn't matter that your directors, officers and shareholders stay the same each year. What is important, however, is that you hold the meetings.
If you incorporated through some sort of office supply store or internet forms, this might sound foreign to you. Unfortunately, these outfits often show you only how to incorporate (i.e., file the articles of incorporation). But if they've not created a corporate internal structure (such as bylaws, and annual meetings), your corporations is next to useless in the face of a lawsuit.
If you need help with annual meetings or any other corporate advice, please contact me at wldeaton@vnet.net.
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