How To Limit a Corporation's Liability

Limiting a corporation's liability is done by the actions and policies of the corporation itself. Limiting the liability of the individual shareholders is done by setting up the corporation and maintaining corporate formalities.

A corporation's liability can be controlled, regardless of the business the corporation is in, by first implementing risk management policies and procedures. Designating one officer of the corporation to be a risk manager and developing a comprehensive risk management policy is a preventative and continuing method to limit corporate liability.  The risk management policy and procedures should be adopted by the directors of the corporation and provided to the management personnel.

In addition to implementing and maintaining internal policies to prevent corporate liability, a corporation should also carry all applicable insurance policies. Typically commercial general liability, directors and officers, errors and omissions, or comprehensive liability policies will protect corporate actions. There are other specific insurance policies that may be applicable or more appropriate, such as property insurance if the corporation is in the real estate business or owns any property.  Maintaining proper insurance policies transfers the risk of a corporation's liability to an insurance company in exchange for paying the insurance policy's premiums. Having the right insurance coverage can be integral when a corporation is faced with a sizeable liability.

Limiting the individual liability of the owners, shareholders, directors or officers, is accomplished by creating the corporate structure itself.  A shareholder's liability is limited to the amount of that person's investment in the corporation. In other words, if the corporation loses everything, the shareholder only loses the money it paid to buy the shares.  The directors and officers are protected from personal liability by acting within the scope of their employment with the corporation, and respecting their fiduciary duty to the corporation itself and the shareholders.

First, corporations must maintain corporate formalities by keeping the corporation's money separate from that of the owners, having required corporate meetings, and maintaining corporate records. If the corporation fails to do this, the owners may lose their liability protection and a claimant against the company may be able to pierce the corporate veil.

Second, directors and officers of the corporation have to remember that they are considered fiduciaries of both the corporation and the individual shareholders. As fiduciaries, the directors and officers have certain duties and responsibilities to both the corporation and the shareholders. However, they will not be personally liable for the corporation's bad investments if they followed the business judgment rule. In other words, the directors and officers must make reasonable decisions for the corporation, not necessarily the right decisions.

In conclusion a corporation limits its corporate liability with proper risk management controls.  Individual owners or directors limit their liability by keeping corporate formalities and respecting their fiduciary duties.


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