29 Nov 2022

Can Officers & Directors Be Held Personally Liable?

Can officers and directors be held personally liable? While they have some protections, they are not invincible.

Officers and directors are the management tier of a corporation. While the directors manage high-level business matters, officers oversee the day-to-day operation of the company. Moreover, these positions can be shareholders, employees, appointed individuals paid for consulting, or a combination. 

So, can officers and directors be held personally liable? Typically, an officer’s personal liability in corporate matters depends on the details of the case. Moreover, the formal connection to the corporation plays a role. 

Let’s take a look at a few examples. 

Limited Liability Protection

One of the core features of a corporation is its limited liability protection. Corporations are independent, legal entities formed under state law. As such, each exists separately from its shareholders. 

“Limited liability” protects officers, directors, employees, and shareholders against personal liability for corporate debt and actions taken in the company’s name. Usually, the individual cannot be held personally liable. 

Fiduciary Duties

If you are an officer on the board of directors of a company, you have a legal duty to maximize profits and act in the best interest of shareholders. While officers on the board have limited liability for the actions they take on behalf of the corporation, they do not have protection in certain instances. 

  • Breaching fiduciary duties 
  • Engaging in self-dealing
  • Putting their personal interests over the corporation

These are a few examples in which an officer can be held personally liable. 

Illegal Activity 

This may be common sense, but it’s good to cover. When a director or officer does something grossly negligent or illegal, they can be held personally liable. This is true even when the actions fall under the umbrella of the corporation. 

Here are a few examples. 

  • Lying to a government agency or official 
  • Manipulating investors out of money 
  • Misleading the public 
  • Stealing corporate resources
  • Embezzling 
  • Sexually harassing others

If they do anything illegal, they can face criminal or civil penalties as well as jail time. 

Piercing the Corporate Veil

“Piercing the corporate veil” refers to a court’s power to disregard limited liability protections in certain instances. For example, if the court finds that the corporation is a shell company used to take advantage of creditors, they can disregard those protections. 

Other examples include when employees, directors, officers, or shareholders: 

  • Use the company as a personal bank
  • Mix personal and business funds
  • Do not comply with the formal requirements of a corporation 

In these instances, the court has the power to hold individuals personally liable. 

Out of Good Standing

A corporation is incorporated in the state where it files the incorporation articles. In some states, corporations have to file an annual report or pay annual fees to remain in good standing. 

If the corporation does not meet these obligations in a timely fashion, the state has the power to suspend the corporation’s authority to do business. Moreover, if the registration lapses, it leaves those involved at risk of being personally liable in the event someone sues the company. 

Consult an Attorney for Questions About Liability

If you feel at risk of personal liability in your position, contact an employment attorney Houston trusts. At The Craighead Law Firm, we have extensive experience protecting the rights of executives. When you are dealing with a liability claim or suspect someone acted in their own interest, contact our attorneys to learn more about your options.

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