The main reason that people form corporations is that they can limit personal liability for business debts. However, there are important requirements and formalities that must be followed. Tax returns are much more complicated for corporations and there are many rules that must be followed or the benefits of a corporation can be lost.
There are ways that the benefits of limited liability can be lost. In these instances, it will not protect a shareholder or director’s personal assets. An owner of a corporation can be held personally liable in the event that they personally hurt, damage or injure someone, any time there is a personally guarantee on a bank loan or a business debt that the corporation does not pay, if something fraudulent or illegal occurs, if there are irregularities with the record keeping or if an individual treats a corporation as if it were merely an extension of their own personal accounts or affairs.
Treating a corporation as if it were one’s personal account is the most common way that personal liability is conferred. A plaintiff in a lawsuit will often try to get a ruling that a corporation is not separate from a director, shareholder or officer. This is commonly known as “Piercing the Corporate Veil“. When this occurs, the advantages of the corporate structure are lost and the corporation is given no more protections than a sole proprietorship or partnership would have.
This can be accomplished by showing that there is inadequate capitalization of the corporation, failure to formally issue stock to the shareholders, failure to hold regular meetings or that there is significant co-mingling between the accounts of the owners and the corporation. It is too late to try and follow the rules once the corporate veil has been “pierced”. A corporate structure can provide significant advantages to a business but if care is not taken the advantages can easily be lost.