Legal Question in Business Law in California

Re: Incorporated Business

There are maybe three ways in which you could be held personally liable.

First, if you personally guaranteed the corporation's liability to this creditor. Many lenders and some suppliers of goods or services will require a personal guarantee from the major shareholder(s) of a new, undercapitalized or non-established-credit corporation.

Second, if the corporation was operated without due regard for its separate-entity neture, the owner can be liable under a "veil-piercing" theory. That is, if the corporation is found to be the "alter ego" of the owner, through habitual commingling of funds, for example, the corporation will be disregarded if necessary to do justice to creditors. This doesn't happen too often in the real world, but it can.

Third, there is a principle called the 'trust fund doctrine' that holds that the directors of a failing corporation are trustees of the corporation's limited assets, and that the creditors of the corporation are beneficiaries of that trust. If the directors pay themselves or other insiders such as stockholders or officers before they pay non-insider creditors, that is a violation of the trust and the directors are personally liable for breach of that trust. This theory is augmented by the Uniform Fraudulent Transfers Act, that declares that transfer of any kind of property for less than fair market value is a fraud on an existing or potential creditor of the transferor.

Nevertheless, I'd say if you ran the corporation with due regard for its separate nature, didn't give a personal guarantee, and didn't put corporate assets (money, equipment) into your own pocket or garage when the business was shut down, you're pretty safe. Otherwise, beware!