Individual Liability for Owners of a North Carolina Corporation Without Personal Guarantee
May 20, 2013
One reason corporate structures were created was to protect individual business owners and related entities from personal liability. Unfortunately, some parties take advantage of the corporate structure by acting improperly or in breach of contract, believing there will be no personal recourse. This creates problems for individuals victimized by these companies and, just as importantly, for legitimate companies whose corporate status is wrongfully challenged. In North Carolina, you can obtain a judgment in a case against both the corporation and its individual business owner if you can “pierce the corporate veil.” If you have been treated unfairly or illegally by a corporation, or if someone is suing you or your company, contact the civil business litigation attorneys at Maginnis Law, PLLC. Maginnis Law is a Raleigh civil litigation firm with attorneys that handle a wide range of corporate and business contract disputes. Contact the firm at 919.526.0450 or submit a new case inquiry here.
Typically, courts will disregard the corporate entity – and pierce the corporate veil – under two main circumstances: when an individual owner undercapitalizes the corporation or a parent company dominates a subsidiary. Courts will determine whether the corporation is operating as a “mere instrumentality” or an “alter ego” of another person or entity. Courts will also pierce the corporate veil if they find a person or entity completely dominates a corporation such that the entity has no legitimate existence of its own. That control must have been used to commit a fraud or wrong that is dishonest and unjust, and directly related to the injury.
The factors the court will consider include:
- Inadequate capitalization of the corporation;
- Non-compliance with corporate formalities;
- Non-payment of dividends;
- Insolvency of the debtor corporation;
- Siphoning of funds by the dominant shareholder;
- Absence of corporate record;
- Domination and control of corporation by another entity or person; and
- Excessive fragmentation of a single enterprise into separate corporations.
Courts will oftentimes go after individuals or other entities personally when it would be unjust to only hold the corporation responsible. If a person or entity created the corporation solely as a subterfuge to act unfairly, the court will make efforts to hold those parties accountable. Oftentimes the veil will be pierced in tort situations (i.e. when individuals are hurt or injured as a result of a corporation’s negligence) and the corporation is not sufficiently funded or insured to compensate the injuries. However, recent North Carolina case law indicates that a party in breach of a contract can be subject to a veil piercing after a failure to perform.
Piercing the corporate veil, and defending against wrongful piercing allegations, requires a dedicated and thorough investigation which our civil litigation attorneys are experienced in handling. Contact the civil litigation attorneys at Maginnis Law, PLLC to speak with one of our attorneys today. We regularly represent clients throughout the Triangle including Raleigh, Durham, Chapel Hill, Cary, Apex, Knightdale, Morrisville, and Garner. Our firm offers a variety of billing arrangements such as hourly, retainer, and flat rate. To speak our civil attorneys, contact the firm at 919.526.0450, or send a confidential email inquiry using our contact page.