Businesses incorporate for a variety of reasons. Sometimes they do so to get a tax break. Sometimes the owners want to find and attract new investors in the company. The corporate structure can provide more liquidity of ownership interests. But the main reason most companies incorporate is to limit the personal liability of investors in the event of a calamity.
If your firm is representing a plaintiff who has been wronged by a corporation, it is the corporate entity that will be named as the defendant in the lawsuit -- not any of the corporation's principals. Sometimes, however, a pre-lawsuit inquiry of the corporation turns up very little in the way of property to satisfy a judgment, ...view middle of the document...
Proving Individual Liability
The courts apply several tests to determine whether a corporation has run afoul of the law and opened its shareholders up to personal exposure. The following types of records can help you find areas indicating problems:
*The articles of incorporation.
*All books and records, including: minutes of board of directors and shareholder meetings, notices of the meetings, corporate resolutions, bylaws and stock books.
*The corporation's general ledger, showing accounts payable and receivable, check registers, records of deposits and bank statements.
*Documents indicating debts owed by or to the corporation including notes, security instruments and payment records made or received.
One of the factors looked at by the courts, for example, is whether the corporation has been properly conducting its annual meetings, preparing minutes, issuing stock and passing resolutions for important business. Check the records when they come in to see if the corporation properly noticed and then held both shareholder and board of directors meetings. Examine each set of minutes and observe whether they appear to have been prepared close to the time the meeting was held, or whether they all look brand new. The latter may indicate that they were hastily typed up for your document production!
Check the stock books to see if stock was issued and to whom and when. If only one person holds all the shares of the company, it could be a sign that the corporation is merely a front for the individual's own personal business. Also review the bylaws and filings made with the secretary of state to see who the officers and directors...