Can a Corporation Be Sued for Credit Card Debts?
For purposes of contractual liability for credit card debt, the law makes no distinction between an individual and a duly authorized corporation. A creditor can sue a corporation for defaulting on its obligations in the same manner that she can file a legal claim for recovery against a delinquent individual debtor. The more important question is, under what circumstances could an individual shareholder be liable for the credit card debt incurred by the corporation?
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Piercing the Corporate Veil
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Under certain circumstances, through a process known as "piercing the corporate veil," creditors may be able to hold shareholders personally liable for any corporate debts incurred. In order to prevent fraud or injustice to third parties, courts will perform an analysis to determine whether the corporation has been used by its individual shareholder(s) in such a manner that in terms of substance no separate legal entity was maintained.
If the individual shareholders act in a manner inconsistent with an intent to accord a separate legal identity for the corporate entity, courts will pierce the corporate veil and conclude that the corporation functions merely as the "alter ego" of its individual shareholders.
The most common occurrences that usually support a finding that the shareholders treated the corporation as their alter ego are failure to observe corporate formalities and commingling of corporate assets with those of individual shareholders.
Failure To Maintain a Separate Corporate Identity
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In order to avoid personal liability for the credit card debts of the corporation, individual shareholders should establish and maintain separate books and accounting records for the corporation. Bank accounts in the name of the corporation should be opened, used exclusively for all corporate business conducted, and audited when necessary.
Corporate earnings and disbursements should be deposited and paid out of the corporate bank account only, and commingling of personal with corporate funds should be studiously avoided. Examples include using corporate funds to pay private debts or using other corporate assets for the shareholder's private purposes.
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Failure To Observe Corporate Formalities
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Individual shareholders also must meticulously observe corporate formalities. This would include electing officers and directors, as well as holding regular meetings of the shareholders and/or directors in accordance with the schedule as designated in the corporate by-laws. In addition, stock should be issued to the designated shareholders as authorized in the articles of incorporation.
Undercapitalization
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In some jurisdictions, under certain conditions, shareholders may be held liable for corporate debt if it appears that the corporation was organized without sufficient capital to meet the obligations that reasonably could be expected to arise in the normal course of operating the business.
Special Situations
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Even if a separate and distinct corporate identity is rigorously maintained by its shareholders, if one of the shareholders personally guarantees all or any portion of the credit card debt incurred by the corporation, in the event of a corporate dissolution, that shareholder remains personally liable.
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