A corporation in New Jersey must follow certain formalities in its formation and operation to maintain its status as a corporation with respect to protecting its shareholders from personal liability.
In New Jersey, shareholders generally are not liable for claims against the corporation for amounts greater than their investment in the corporation. N.J.S.A. § 14A:5-30(2) states: “Unless otherwise provided in the articles of incorporation, a shareholder of a corporation is not personally liable for the acts of the corporation, except that a shareholder may become personally liable by the reason of his own acts or conduct.”
Indeed, the New Jersey Supreme Court has recognized “that a primary reason for incorporation is the insulation of shareholders from the liabilities of the corporate enterprise.” State Dep’t of Envtl. Prot. v. Ventron, 468 A.2d 150, 94 N.J. 473, 500 (N.J. 1983). This separation of a corporation from the individual assets of its shareholders is termed a “corporate veil.”
However, shareholders may still be held personally liable (that is, the corporate veil may be pierced) if (i) a statute — such as the New Jersey Consumer Fraud Act, which this author has discussed here — imposes such personal liability, (ii) the corporation is “used to defeat the ends of justice, to perpetrate fraud, to accomplish a crime, or otherwise to evade the law,” Ventron, 94 N.J. at 500, (iii) the shareholder uses a position of power to commit a tort directly or to breach a duty to other shareholders, or (iv) the corporation fails to follow certain formalities in its formation and operation, see Yacker v. Weiner, 263 A.2d 188, 109 N.J. 351, 360 (N.J. Super. Ct. Ch. Div. 1970), aff’d, 114 N.J. Super. 526 (N.J. App. Div. 1971).
Among the corporate formalities which the shareholders of a corporation may need to observe in order to protect themselves from personal liability are the following:
Failure to abide by these corporate formalities can result in shareholders, parent corporations, or affiliated corporations being held liable for the corporation’s debts and obligations.
If your company wants to bring, or needs a lawyer to defend it in, business litigation and you are located in the Manhattan City area, call Attorney David S. Rich at (347) 941-0760.
David S. Rich is the founding member of the Law Offices of David S. Rich, LLC,
a Manhattan Employment and Business Litigation Law Firm, in New
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