The Edmond Sun

November 30, 2012

ASK A LAWYER: Check carefully for investment liabilities

Matt D. Hopkins
Special to The Sun

EDMOND — EDITOR’S NOTE: This is a weekly series of columns written by attorneys at Lester, Loving & Davies law firm in Edmond.



Q: I am considering buying stock in a friend’s corporation. If I become a shareholder, will I be liable for the debts of the company?

A:
As a general rule, shareholders have no personal liability for company debts. Members of limited liability companies generally have the same protection. The rule is in place to encourage investment in business. But, as you may suspect, the general rule is just that — general. There are exceptions that sometimes make shareholders liable for the company’s debts. Though we can’t cover all exceptions here, I will point out a few.

You should review the stockholder’s agreement and bylaws of the corporation before you invest. Most general rules provided by Oklahoma’s corporate statutes can be changed by language in the corporate documents. You should review them carefully, preferably with an attorney.

Shareholders are sometimes asked to serve on the board of the company, or even to be officers. This can be a tempting invitation because it gives you better insight to and more control over the company’s activities. But with more responsibility comes more potential liability. While you may have protection as a shareholder, you may have less protection if you serve as an officer or on the board. Again, review the company documents and ask your attorney for guidance before you agree to a role beyond that of investor.

Statues and case law also make shareholders liable for company obligations in certain situations. For example, if the Secretary of State suspends the corporation or limited liability company for failure to pay fees or taxes that are due, owners can be liable for company debts accruing during the suspension. Or, if shareholders comingle corporate and personal assets in a way that make the corporation a sham, creditors can attempt to pierce the corporate veil and hold owners liable.

Everyone associated with a company — as shareholders, directors, officers or employees — usually remains liable for certain types of his own wrongful conduct. If a person who has no liability by virtue of being a shareholder participates in a fraud or other act that creates a liability, that person may be on the hook not by virtue of his ownership interest, but by virtue of his action.

Investment in closely held corporations or limited liability companies can be very rewarding. But don’t do it without paying attention to the company’s actions. And know what you are getting into before buying in.



MATT D. HOPKINS is an attorney for Lester, Loving & Davies P.C. More information is available at lldlaw.com. Send questions to questions@lldlaw.com.