Owners often choose to form their businesses as corporations or limited liability companies under New Jersey business law. The case of Colonial Records Storage, LLC v. Simpson, where a creditor tried to get individual liability against a lawyer who was a shareholder in a law firm operating as a corporation, illustrates exactly why.
The law firm of Stein Simpson & Rosen was a New Jersey professional corporation; Nancy Simpson was an attorney with the firm and was a shareholder, or owner. A professional corporation operates under the same rules as a regular corporation, except that a professional corporation provides professional services such as those of lawyers, doctors, etc., and the shareholders may be personally liable for professional negligence, or malpractice in the course of providing those professional services. The law firm went out of business, although it had not formally dissolved. Simpson retired.
Colonial Records Storage was a New Jersey limited liability company. It “stored, shredded, and delivered retained business records for professionals.” One of the entities it provided these services for was the law firm of Stein Simpson & Rosen. In 2017, however, the law firm stopped paying Colonial. Colonial then sued the law firm, but also sued Simpson personally.
A bench trial was held. All witnesses confirmed that the money was owed, but that neither the firm nor Simpson had ever provided professional services for Colonial. All of the invoices were sent to the law firm, not Simpson. There was no written agreement in which Simpson promised to be personally liable for the debt. However, the trial judge found both the law firm and Simpson personally responsible for the storage fees, which he determined to be $14,049.51.
The Appellate Division’s Opinion
The Appellate Division reversed. The Appellate Division agreed that because neither Simpson nor the law firm provided any professional services to Colonial, Colonial could not “pierce the corporate veil” to impose liability directly upon the shareholders.
The Appellate Division relied on the section which governs liability of shareholders in a professional corporation, N.J.S.A. 14A:17-8:
Any officer, shareholder, agent or employee of a professional corporation… shall remain personally and fully liable and accountable for any negligent or wrongful acts or misconduct committed by him, or by any person under his direct supervision and control, while rendering professional service on behalf of the corporation in this State to the person for whom such professional service was being rendered; provided, that the personal liability of shareholders of a professional corporation, in their capacity as shareholders of such corporation, shall be no greater in any aspect than that of a shareholder-employee of a corporation organized under the provisions of the Business Corporation Act of New Jersey, exclusive of this act. (Emphasis added).
The Appellate Division rejected the trial judge’s interpretation of that statute allowe a creditor of the corporation to pierce the corporate veil and obtain personal liability against an owner for any debt of the company. Rather, the Appellate Division explained, the law clearly placed the shareholder in a professional corporation on the same footing as one in any other corporation, except for liability for malpractice in providing professional services.
Thus, the Appellate Division explained:
However, shareholders of a professional corporation, in their capacity as shareholders, have the same protections from liability that a shareholder of any other corporation would have.
….N.J.S.A. 14A:5-30(2) declares “[u]nless otherwise provided in the articles of incorporation, a shareholder of a corporation is not personally liable for the acts of the corporation, except that a shareholder may become personally liable by the reason of his own acts or conduct.” For example, “`[a]n individual may be liable for corporate obligations if he was using the corporation as his alter ego and abusing the corporate form in order to advance his personal interests.”
Therefore, since there was no allegation either that Simpson or the firm provided legal services to Colonial, that Simpson had personally guaranteed the law firm’s debts, or that she used the law firm as her alter ego, there could be no personal liability for Simpson merely because she was a shareholder.
The Takeaway: That’s the Whole Point
That’s the whole point. As the Appellate Division explained, “A primary reason for incorporation is the insulation of shareholders from the liabilities of the corporate enterprise.” The limitation against personal liability for the corporation’s debts is exactly why owners choose to form their businesses at corporations.
Beyond corporations, many owners choose to form their businesses as limited liability companies (“LLCs”). Under New Jersey business law, LLCs provide the “corporate shield” against personal liability, but also enjoy the tax benefits of a partnership by escaping the double taxation scheme which corporate shareholders incur.
Thus, wise business owners often form their companies as corporations or LLCs to protect themselves against personal liability, and if they wish the tax advantages of a partnership (who wouldn’t?) they would form the business as an LLC.
Our New Jersey business attorneys represent corporations and their shareholders, limited liability companies and their members, and partnerships and their partners in all aspects of New Jersey business law, including business litigation, disputes between the owners of businesses, negotiations, contract review and drafting, etc. Call us at (973) 890-0004 or fill out the contact form on this page. We can help.