February 2010 Archives

February 23, 2010

Owner Liability for Corporate Acts, or Piercing the Corporate Veil

Companies fail, as the news reminds us everyday now. But if you're an entrepreneur sued in commercial litigation, are you personally responsible for your company's debts? There's no shortage of business lawyers in Philadelphia writing about this issue, but we often hear that most of the articles are difficult for the average business owner to understand, because the answer unfortunately really rests on the facts of your case.

The general rule is that Pennsylvania courts are hesitant to hold owners responsible for something the company does, called piercing the corporate veil in legalese. The main exceptions are:

(1) when an owner doesn't treat the company as a separate entity, doing things like making random withdraws from the business account instead of taking a salary;
(2) when the company is used in a fraud, such as for an investment scam or contractors who take deposits but never intend to do the work;
(3) when the company doesn't follow the corporate formalities, such as forgetting to maintain the minute books every year, even if there is only one shareholder; or
(4) when the company is undercapitalized from the start.

To some degree, with the exception of the fraud rule, probably every small business in America is guilty of violating these rules. We get distracted running our businesses, serving customers, and forget to sign the form waiving the annual shareholder meeting or we never raise the initial capital we needed to get the business on the right track from the start. Does this mean you're automatically liable if someone sues your company?

Fortunately, the answer is no. It means you need to speak with a business lawyer soon, someone who understands the rules for the states where you do business. Ideally, you're making that call before you get sued, because its much easier and cheaper to have a business lawyer help you follow the rules correctly in the first place, rather than defend you after something has gone wrong.

If you're at that point where something has already gone wrong, and your being sued personally, you need to get help quickly. The right commercial lawyer might be able to explain to a judge why your circumstances make your case different from the general rules.

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February 15, 2010

Business Bloggers Liability for their Posts

I thought it made sense to start off this blog with a post about the risks of blogging itself. More and more businesses are using both blogs and social media (such as Facebook, Twitter and others) to expand their brand visibility and attract new customers. While there are numerous seminars to teach you how to use all this stuff to your advantage, there are a few legal points you need to keep in mind.

1050872_columns_and_sky.jpgThe 3rd Circuit (the appellate court for PA, NJ, DE, and the Virgin Islands) held a few years ago in Dimeo v Max that bloggers are not liable for comments other people post on their sites. Like everything in the law, there are exceptions, but the general rule is that unless you wrote it or had someone else write it on your behalf you're not responsible.

So the next question is, what about the stuff you write yourself? Blogs are supposed to be open exchanges of information, and the best of them often break news quickly. Does this mean as a blogger you are now a full fledged member of the media, entitled to source protection and back stage passes? Not according to a recent case in New Jersey. In Too Much Media v Hale, the defendant in a defamation case argued that she could protect her sources under NJ's press shield law. In a decision that relied more on an analysis of the facts of Ms. Hale's actions rather than a verdict against bloggers as a whole, the court found a distinction between her posts and those of someone in the business of disseminating news for the general public. While this is good news for companies who are the target of online smear campaigns, it raises some real questions about liability for those bloggers who regularly intersperse news with commentary.