Online “legal” services that offer business start-ups at discounted prices generally only prepare the necessary paperwork to be filed with the state. However, corporation formation is only the first step of keeping compliant with corporate formalities. Unfortunately, where those online services end is often where problems begin. Misinformed or uninformed business owners who do not operate their businesses completely separate from their personal affairs risk costly consequences: losing the benefit of corporate protection and being held personally liable for the acts of the business.
A recent Michigan Court of Appeals opinion affirms the detrimental consequences of comingling personal and business affairs and disregarding corporate formalities. In Woodridge Hills Assoc v Williams, 2013 WL 5762990 (Oct 24, 2013), a condominium association brought suit for performing substandard work against a roofing company solely owned by the defendant. Although the defendant believed the corporation would shield him from personal liability, the Court looked beyond the corporate formation and instead examined the acts of the corporation’s sole shareholder.
In this case the defendant used the corporation to pay for his personal expenses including his personal vehicle, his home cable, telephone and internet services, his family’s cell phone service, athletic club and country club dues, and health insurance premiums for himself and his family. The defendant made several personal loans to the roofing company without executing promissory notes. In fact, the defendant regularly wrote checks to the corporation and then wrote checks to himself. This consistent comingling of personal and corporate finances led the Court to conclude that the defendant’s actions showed a “general disregard for corporate formalities,” and justified imposing personal liability on the defendant for the acts of the corporation.
While the defendant’s actions in this case are an extreme example of blatant disregard for corporate formalities, the Court’s opinion should be a caution to all business owners or persons interested in forming a business. Prudent entrepreneurs understand that mere incorporation is not absolute protection from personal liability. Business owners who use the corporation as a tool for personal business will not escape individual liability.
For more information on corporation formation and regulation, visit the Michigan Department of Licensing and Regulatory Affairs website at: http://www.michigan.gov/lara/0,4601,7-154-35299_61343_35413_35426—,00.html
The entire Michigan Business Corporation Act can be viewed at the following link: http://www.dleg.state.mi.us/bcsc/forms/corp/stat/284.pdf
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