Small Business: Formation and Disputes

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The primary purpose of forming a corporation, such as a limited liability company (“LLC”), is to insulate its members from the liabilities that accompany a business enterprise.

Pierce the Corporate Veil

Courts are generally unwilling to pierce the corporate veil and hold members personally liable unless the corporation is being used to defeat the ends of justice, to perpetrate fraud, to accomplish a crime, or otherwise to evade the law. In an appropriate case, the doctrine may be applied to hold an individual liable for an otherwise-uncollectible judgment against a corporation. The party seeking to pierce the corporate veil bears the burden of proof and must demonstrate the misuse of the corporate form and the necessity of disregarding it in order to do equity.

Nevertheless, a director or officer of a corporation incurs personal liability for the corporation’s torts when he or she commits a tort or directs the tortious act to be done, or participates or cooperates therein, even though liability may also attach to the corporation for that tort. Similarly, the officers of a corporation are personally liable to one whose money or property has been misappropriated or converted by them to the uses of the corporation, although they derived no personal benefit therefrom and acted merely as agents of the corporation. The underlying reason for this rule is that an officer should not be permitted to escape the consequences of his or her individual wrongdoing by saying that he or she acted on behalf of a corporation in which the corporate officer was interested.

Also, under the Wage Payment Law, liability of directors and officers is secondary to the corporation’s liability for salaries, so that the personal liability of corporate officers comes into play in instances where the corporation reneges on its salary obligations.

Foreign Corporations

A foreign corporation is defined as a for profit corporation organized under the laws of a jurisdiction other than New Jersey. The authority of a foreign corporation to do business in New Jersey is governed by the New Jersey Business Corporation Act. To transact business within New Jersey, a foreign corporation must file a certificate of authority from the New Jersey Secretary of State, including a certification the entity is in good standing in the jurisdiction of its incorporation. Failure to procure a certificate of authority precludes the foreign corporation from maintaining any action or proceeding in any New Jersey court.

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To discuss your specific situation, please call me, Paul G. Kostro, Esq., to schedule an appointment: 908-232-6500 or Paul@Kostro.com

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