Personal Liability of Corporate Officers

One of the hardest jobs around is a corporation officer. The upside to this is that it gives you the chance to use your brain to think strategically or even to be viewed as a visionary. However, with the good, there is always a bad. Corporate officers are handcuffed and escorted away by the police and charged with corruption on a weekly basis it seems. They are often the subject to government investigations, lawsuits by their shareholder and (potentially even more damning) negative public opinion.

These corporate officers are typically receiving extensive sentences with long terms behind bars, which is leading many to fear for their own liability—and justifiably so.

Why Is This Happening?

Before charging a corporate officer with personal liability, a court must first decide whether the officer’s involvement in the conduct was a result of any previous knowledge of unlawful act(s). This would explain the increasing number of lawsuits that are linked to those on Wall Street; as well as, the numerous banking debacles that have combined to create the financial issues that have occurred in recent years.

While the courts haven’t hashed out a bright-line rule governing personal liability of corporate officers, there are numerous instances where officers can be held personally liable for any misconduct. One instance where the courts have consistently held up is intentional conduct—these instances will most always result in a personal liability.

Likewise, corporate officers who authorize, direct or actively participate in wrongful conduct are in danger of incurring a personal liability actions enforced by their corporation. Moreover, the idea of a ‘business judgment rule’ has not proven to be a means of protection for corporate officers. This is because there has been a recent appellate ruling that determined using a ‘business judgment rule’ does not save a corporate officer from liability.

How to Prevent Legal Woes

Luckily, courts are less likely to levy a sentence upon a corporate officer if they are unintentionally negligent rather than participating in intentionally harmful conduct. Moreover, it is very rare for corporate officers to engage in such conduct deliberately. Below are some examples of ways officers can avoid personal exposure.

  • Ensure your corporation has both appropriate and sufficient insurance to cover any liability
  • Include provisions in your bylaws requiring insurance for negligence
  • Ensure in corporate governance that officers have information about all ongoing activities
  • Establish checks and balances

Chances are corporate officers will continue to have actions taken upon them in the future. In addition, this will most likely cause them to increase their efforts to identify new ways to help recover their damages (both monetarily and personal reputations).

MaxFilings can provide you with more information about incorporating a business and other aspects of ways to run your business successfully. If you are just starting a new business and looking for help with incorporation, do not hesitate to check out our Knowledge Center.

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