By Fredrick P. Niemann, Esq., a NJ Shareholders Attorney
Many NJ corporations are structured today so that a few shareholders comprise the ownership of the business. These shareholders must be aware that the powerful “piercing the corporate veil” tool may subject them to individual liability for the corporation’s actions, even though they are not the sole owner of the business. The piercing of the corporate veil tool is used by plaintiffs to essentially pierce the shield that protects shareholders from liability stemming from acts of the corporation. Typically, owners/shareholders are not held personally liable for acts committed by the corporation as an entity. However, under certain limited circumstances, Courts will allow the plaintiff to hold to the individual shareholders themselves liable if the NJ Court determines that the corporation was purposely underfunded or put in place so that the shareholders could fraudulently avoid liability.
In determining whether a plaintiff can pierce the corporate veil, New Jersey Courts will look at each case individually, taking into account numerous factors. A recent NJ Court case involved such a situation. The Court looked at a number of different considerations from the facts before holding that the defendant could not be held individually liable for the corporation’s actions. First, the Court found it significant that the individuals had not purposely underfunded the corporation or taken any assets from the corporation prior to dealing with the plaintiff. Furthermore, the Court found that there was no evidence showing that the individuals were attempting to avoid the financial risks associated with the business dealing or defraud the plaintiff in any manner. Finally, the NJ Court found that although the business credit card had been used to pay some personal expenses, these expenses were minimal and not thus not significant enough to show co-mingling of funds between the shareholder’s personal finances and the corporation’s finances. These factors together led to the Court’s decision that the corporate veil could not be pierced and the shareholders would not be individually liable to the plaintiff.
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