You may think setting your business up as a Limited Liability Company (LLC), Limited Liability Partnership (LLP), or corporation gives you full personal protection from legal consequences if your business is found to be noncompliant with corporate regulations. However, there are a few instances in which CEOs may be held responsible for the debts incurred or noncompliant actions taken by their business – with or without their direct knowledge of these occurrences.
Whether you are a current business owner or are still in the planning stage of your startup, make sure you are familiar with the three main situations in which you can be held personally liable for your company’s noncompliance. If you don’t take steps to protect yourself as the business leader, you and your family risk paying the consequences of your company’s noncompliance for many years to come.
Piercing the corporate veil
While the next two scenarios that can bring on personal liability are more clearly wrongful, piercing the corporate veil is often the result of a lack of corporate regulation awareness or poor business organization. In other words, it is an area of noncompliance that is easy to fall into if you are not diligently maintaining proper business order and function.
Piercing the corporate veil includes any action that violates the independent “personhood” of your company by A) comingling your personal and business assets, B) failing to follow corporate formalities like preparing regular meeting minutes and establishing Articles of Organization, or C) making business decisions that lead to excessive corporate debt. If an activity directed or taken by a CEO or business owner crosses the line between their personal activities and those of the business, they are at risk of being held personally liable if the business is found guilty of noncompliance.
Personal wrongdoing while acting as CEO
If you commit a crime while operating in your corporate capacity, such as by directing or allowing the falsification of accounting records, purchasing illegal products or colluding with competition to fix prices, you can be held personally liable for the action you took or directed. In some cases, the CEO may be held personally responsible even if they themselves did not commit or direct the noncompliant occurrence, but if it occurred as a result of their gross negligence. Especially in the case of criminal acts, the CEO can be held liable for the charges resulting from law enforcement investigations.
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Personal wrongdoing at home
If an investigation of a business reveals evidence of its CEO’s unlawful behavior, such as personal tax fraud or embezzlement of corporate funds, the CEO will be held personally liable for the legal ramifications. Despite these actions being taken while the CEO was operating in a personal capacity, rather than in their corporate capacity, both the company and the CEO can be held liable for the noncompliance because it involved business assets.
How can CEOs protect themselves from personal liability?
CEOs can purchase liability insurance to further protect themselves from some corporate noncompliance charges, though this insurance tends to be limited in its scope and covered circumstances.
In the case of gross negligence, CEOs can protect themselves by being present in the daily activities of the company and fostering healthy relationships with key leaders who can keep them informed on operations. Monitoring the pulse of your business from the C-suite to the end of the supply chain can go a long way in protecting you from legal consequences that arise from negligence.
The most obvious protection against personal liability is to follow federal, regulatory, and taxation laws carefully. If you own a small business where you are the only employee or the business operates out of your home, you must take intentional steps to keep your personal and business assets separate. Regardless of the size of your business, do not allow the corporate veil to be pierced by comingling funds or overextending your company’s capital. It is critically important to follow every corporate regulation and best practice closely.
Want more? Escalon provides startups and small to midsized businesses with expertly delivered back-office services such accounting, strategic finance, HR and taxes, that help keep companies compliant. Talk to an expert today.
