Good Georgia Contract Lawyers will explain that one of the primary purposes to incorporate your business or create an LLC is to protect yourself from personal liability for business debts and claims. While business owners who incorporate or convert their business into an LLC enjoy limited personal liability for many of their business transactions, this protection is not absolute.
Despite having one’s business incorporated or formed into an LLC, an owner can be held personally liable if he or she: personally injures someone; personally guarantees a bank loan or business debt on which the business later defaults; intentionally does something considered fraud, illegal, or reckless that harms the company or someone else, or co-mingles funds: i.e. treats the LLC as an extension of his or her personal affairs, rather than as a separate legal entity.
This type of conduct is also called “piercing the corporate veil.” The reason for this term is because your legal entity is considered a veil or shield that protects you from personal liability. Once you violate the rules surrounding it, the veil is considered “pierced” just as if a sword had stuck into it. Once the corporate veil is pierced, it can no longer protect you as a business owner.
Thus, it is important to carefully protect yourself and your business by avoiding such conduct that would be considered veil-piercing.
In Soerries v. Dancause, 248 Ga. App. 374 (Ga. Ct. App. 2001), a sole business owner of a nightclub was sued when the family of an intoxicated 18-year old girl left the nightclub severely drunk. Although a city ordinance prohibited individuals under 21 years old from entering nightclubs, it is undisputed that the club employees did not check the girl’s identification to establish her age. After drinking that night, the girl left at approximately around 3:00 a.m. with a beer in her hand and was killed when she lost control of her car and struck a tree.
The jury pierced the corporate veil and found the business owner jointly liable with his corporation because he had commingled individual and corporate assets by personally assuming the corporation’s financial liabilities, waiving corporate rental payments, and using corporate funds to directly pay his personal mortgage notes and other expenses.
Therefore, the Court ruled that the jury could disregard the corporate entity and that there was evidence to sustain the verdict finding him personally liable for compensatory and punitive damages.
In Pazur v. Belcher, 290 Ga. App. 703 (Ga. Ct. App. 2008), the Georgia Supreme Court stated that an officer’s personal liability for corporate debts due to a piercing of the corporate veil rests on the notion that a corporate officer, or owner, who has abused the corporate form by commingling personal and corporate assets, should be held liable for corporate debts and liabilities. The Court explained that the focus in that type of liability is the abuse of the corporate form, not the personal participation of the officer in the tortious conduct at issue.
The Court further enumerated that the concept of piercing the corporate veil is applied in the State of Georgia to remedy injustices which arise where a party has over extended his privilege in the use of a corporate entity in order to defeat justice, perpetuate fraud or to evade contractual or tort responsibility. To prevail based upon that theory, it is necessary to show that the shareholders disregarded the corporate entity and made it a mere instrumentality for the transaction of their own affairs; that there is such unity of interest and ownership that the separate personalities of the corporation and the owners no longer exist. Personal participation in the tort is irrelevant. Pazur v. Belcher, 290 Ga. App. 703 (Ga. Ct. App. 2008)
If you are a small to mid size business owner, you need to be aware of these important issues in order to protect yourself and your business by avoiding such acts that would be considered veil-piercing.
For more information on protecting your business, contact Williams Oinonen LLC at 404-654-0288.