Are the officers, directors, or shareholders of a US company subject to personal liability?

We are often asked by our clients whether a US limited liability company or corporation will insulate its officers, directors, or shareholders from liability for company obligations. The short answer is that, as in the UK, a US LLC or corporation generally offers such protections. However, there are a few notable exceptions:

1. Piercing of the corporate veil. Courts can “pierce the corporate veil” and hold shareholders personally liable if they engage in fraudulent or illegal activities, commingle personal and corporate assets, or fail to follow corporate formalities. This is a very rare event. Although the standards differ slightly, this power is resembles a UK court’s power to pierce the corporate veil.

2. Unpaid wages. In some US states (notably California and New York), officers, directors, and shareholders can be personally liable for unpaid wages owed to employees. In addition, under federal law, corporate officers and directors can be personally liable for violations of federal minimum wage and overtime laws.

3. Certain payroll taxes. Similar to PAYE in the UK, employers in the US withhold tax from their employees’ pay and are responsible for remitting it to the government. This is the government’s money, which the employer holds in trust. Consequently, certain persons who have control over a company’s payroll, tax withholding, or bank account can be personally liable for these taxes. This often includes officers and directors.

4. Sales tax collected. In some states, individuals involved in a company’s financial management or decision-making can be personally liable for unpaid state sales taxes if the company collects sales tax from customers but fails to remit it to the state.

5. Personal guarantees. If the officers, directors, or shareholders personally guaranty the company’s obligations, then a creditor can directly enforce the obligation against them. In some cases, this can be done even without first attempting to collect from the company.

6. Directly committed torts. Officers, directors, and shareholders can be personally liable for their own tortious actions committed on behalf of the company. Thus, for example, if a director or officer defrauds a customer, the mere fact that the fraudulent conduct occurred while acting on behalf of the company will not insulate the director or officer from liability. Rather, the director or officer will likely be jointly liable with the company for the tort.

Finally, a brief word about share capital. In the UK, personal liability is typically capped at the amount of any unpaid share capital. In the US, in contrast, share capital is generally not required. Indeed, it is very common for corporations to issue shares at no par value. Thus, the concept of unpaid share capital does not play a pivotal role in assigning liability to shareholders.