LIMITED LIABILITY OF CORPORATE SHAREHOLDERS

Question 1

Who are Shareholders?

Answer 1

Owners of a Corporation (NOT managers-which would be directors)

Question 2

Can Shareholders Manage a Corporation?

Answer 2

Generally, no. Managing is left to the directors. But shareholders can manage if:

(1) stated in the articles, or
(2) Pursuant to unanimous shareholders agreement

Question 3

Shareholder Liability

Answer 3

A corporation provides limited liability to its shareholders.

Question 4

Piercing the Corporate Veil

Answer 4

Generally, under the limited liability provided to shareholders in corporations, a shareholder is not liable (start with that general principle). However, a plaintiff is able to pierce the corporate veil when the plaintiff will prevail (very rare) in holding the shareholders liable for its debts.

3 common methods: Alter Ego, Gross Undercapitalization for Business, and Piercing a subsidiary company to reach the parent corporation

Question 5

Alter Ego

Answer 5

“other self”

It is where a corporation treats its assets, funds, and property as personal. Essentially, this is commingling, which is unacceptable, and one way a plaintiff may be able to pierce the corporate veil.

Question 6

Gross Undercapitalization for Business

Answer 6

Where a corporation starts off with little money, no insurance, and dangerous business, for example.

If the corporation makes extremely poor and reckless choices that place the corporation in a position of being grossly undercapitalized for business, this may be used by a plaintiff to pierce the corporate veil.

Question 7

Piercing a Subsidiary (in a parent-subsidiary relationship)

Answer 7

One method to reach the parent corporation when seeking to hold corporations liable.