Personal Liability in Business Lawsuits: When Executives and Officers are Named Individually

Many entrepreneurs choose a business structure that can shield them personally from any obligations owed by their company. The idea is simple: if the business is sued, only the company is responsible. Executives, managers, or owners will not face personal liability for these debts, which could otherwise put their homes or savings at risk.

These protections usually work as intended, but there are some circumstances where an individual could find themselves on the hook for a business liability. It is important not only to understand how this can happen but also to be aware of the steps you can take to avoid it.

Why Executives Get Named in Lawsuits

When a business is sued, plaintiffs often look for additional sources of recovery. This is especially common if they believe the company lacks sufficient assets to pay down the debt.

Sometimes the claims focus on personal conduct. Other times, they are built around arguments that the company structure was misused. In either scenario, the ultimate goal is to go beyond the company’s assets and settle the claim using an individual’s resources as well.

While being named individually can feel alarming, it does not automatically mean you are on the hook for company debts. Courts in Georgia require plaintiffs to meet specific legal grounds before they allow a claim to proceed against an executive or officer in their individual capacity.

Piercing the Corporate Veil

When a judge determines that the lines between a company and an individual have blurred, they may allow a creditor to “pierce the corporate veil.” This means they may ignore the liability protections afforded to corporations and sue an owner or executive directly.

It is possible to pierce the corporate veil, but that doesn’t mean this process is common. The courts will not allow a lawsuit against an individual to proceed simply because the person in question has a controlling interest in the company. A plaintiff will be successful only if they can show that the organization’s purpose was to shield them from liability.

This often involves evidence that the organization failed to act like a normal company. Investigators might look for evidence of commingling personal and business funds or undercapitalizing the company from the outset. If the business is treated as an extension of the individual rather than as a separate entity, a court may hold that person individually responsible for the obligation.

What Is the Business Judgment Rule?

The business judgment rule is vital in protecting corporate leaders from lawsuits arising from their decisions. Under this doctrine, courts generally defer to the decisions of directors and officers when those decisions are made in good faith, even when they have disastrous results.

Business involves risk, which means not every investment will produce a return. The business judgment rule recognizes this reality and prevents courts from second-guessing carefully-made decisions simply because they turned out poorly.

These protections are designed to protect an owner from being second-guessed for every decision they make. It is not in place to shield them from self-dealing or otherwise harming the business by acting on their own interests instead.

Can I Sue a Fiduciary?

Liability concerns are not limited to third-party claims. In closely held companies, disputes among shareholders or partners could result in individual liability for the company’s debts.

Corporate officers owe fiduciary duties to the company and, in many cases, its shareholders. When one owner acts in their own interest to the detriment of the company, other owners could be entitled to damages.

Internal disputes can quickly become personal, especially in businesses with few shareholders. It is often possible to avoid personal liability by keeping a clear divide between the individual and the business.

Steps to Avoiding Personal Liability

While it is impossible to completely eliminate any risk of personal liability, there are some steps you can take to ensure you are shielded on an individual level. They include the following:

Maintain Corporate Formalities

Even in smaller or family-owned companies, it is important to keep up with the formalities that come with running a corporation. You can protect yourself by keeping up with obligations, such as holding shareholder meetings and maintaining separate company records.

Keep Finances Strictly Separate

Commingling funds is one of the fastest ways to undermine limited liability protection. Business expenses should be paid from business accounts, and personal expenses should not be paid from corporate funds. When you start spending company money as if it were your own, it becomes easier for your creditors to reach your personal assets.

Avoid Personal Guarantees When Possible

Lenders and landlords often request personal guarantees, particularly in new ventures. When you sign an agreement on behalf of the business, it is vital that you sign only in your official capacity, not as an individual. If you give a personal guarantee for a business debt, your creditors have the power to come after you directly.

Seek Legal Guidance Early

More often than not, individuals are held liable for the company’s obligations because of some misstep. You can protect yourself from this situation by seeking legal counsel early in the process. The sooner you bring in an attorney to guide you, the stronger your limited liability protections will be.

Talk to Poole Huffman Today

If you are being sued individually on a corporate obligation, now is the right time to seek out an attorney. The team at Poole Huffman can answer your questions and help you protect yourself from these claims. Contact us as soon as possible for a confidential consultation with our team.