Does a sub-s corporation protect a small business owner from personal legal/credit action?

Question

Even among attorneys, I can't seem to get a straight or consistent answer on this.

I've recently run into some debt/dispute problems with my incorporated business. For this debt/dispute with the phone company, I signed no "personal guarantee" that I'm aware of or been able to find.

My business has been legally incorporated for several years now, and was incorporated well before I ran into these problems. Of course, I have signed the advertising agreements with the phone company using my name. However, the business being advertised and billed to is the corporate business name.

Even in a recent "threat" letter from a law firm there was something to the effect of "piercing" my corporation. I've heard this is BS, however it's "important" that the actual agreements I've signed are signed with me as an agent of my company. What does this mean? Can or will the phone company sue just my company or or? If they can sue me personally, on what grounds?

Answer 1

Yes, it typically protects your personal from your business.  However, once you blur the lines between your personal and business then you start to lose the protection.  You can't get a straight answer because its not an easy one.  Basically, the court is going to look to your company and see if you are truly operating it as a separate entity or merely using it to remove the liability from yourself.  You should really have separate accounts and keep all your personal stuff out of it.  Is it the courts business?  Yes, in so much as they will use that information to determine if you are truly operating a business.

Answer 2

Although I am an attorney licensed to practice in California, what follows is not to be construed as legal advice, nor am I undertaking in any manner to represent you in a legal capacity. (Ok...now that the boring disclaimer is out of the way...) The question you are asking is not that simple, and this forum, while very good for quick information, is not really suitable for giving you a reliable answer to your question. Consider the amount of risk you are entertaining, and then ask yourself if you would not be better served by getting this question answered by a knowledgeable professional. I will give you a quick overview, but I would urge you to consult with a good legal professional before you make your decision, because your individual situation could have a serious impact on your decision.

A Sub S corporation doesn't offer any more protection than any other corporation.  Sub S is  a tax election, and has nothing to do with the level of protection you get when you form a limited liability entity such as a corporation.  Limited liability entities are formed so that investors can limit their loss to the amount they have invested.  

In theory, then, this would protect you from being personally sued by any vendor of the corporation.  When people speak of "piercing the corporate veil" they are talking about invoking the legal doctrine of alter ego.  They will have to prove that the business is nothing but sham created solely for the purpose of eluding liabilities.  The two ways this is proved is by showing that the corporation was insufficiently capitalized or that the owners of the corporation failed to observe the corporate formalities.

In California, organizing as a Statutory Close Corp excuses the latter requirement, so that failure to observe corporate formalities (such as holding annual meetings, keeping minutes of directors resolutions, issuing stock, etc.) cannot be used to prove alter ego.

Your other main concern is if you signed a document personally guaranteeing the debt.  This is the number one way the phone company, (who I used to work for, by the way)would go after you.  They routinely find a natural person (as opposed to a legal person, such as a corporation or LLC) to personally guarantee the account.

Your best bet in dealing with the phone company is to try to settle on a compromise.   You may have other defenses available to you in your jurisdiction, which is why I suggest that if your problem is worth more than about $5,000.00 you go to see a lawyer in your area who is familiar with defending phone company charges.

Best of luck!