I am being sued personally even though a I have an S-CORP and all contracts, payments etc were thru the s-corp. How can they?

Asked about 5 years ago - Charlotte, NC

I was an independent contractor w/ my own S-Corp. My contracting company went into contract w/ an organization to perform IT project management work. The company I contracted with was sued for breach of contract, violation of non-compete etc by partners who seperated from their group. After nearly 3 years of delays, I have been joined to the case as a defendent - personally (in my name), not my s-corp. I've since moved out of the original -MO - state where my s-corp was created (but still own property there I can't sell, mortgaged), and have moved to NC - where I've purchased a home for my family and taken a job. My company still exists in name only w/ about $1000 in assets and the laptop I'm typing on. How can they sue me as a person when I never took a check, never signed a contract etc in my name? The case is in TX, so there are 3 states involved, and I am being joined nearly 3 years after the case was started. How can I protect my personal assets? I have excellent credit, children in college and I am afraid bankruptcy could result from this. What is my best recouse regarding being personally sued vs. my corporation being sued? How can this happen?

Attorney answers (2)

  1. Warren Alan Kirshenbaum

    Contributor Level 9

    Answered . The short answer is that you can't prevent someone from taking a shot and suing you. It is a legal tactic, and as so long as it is not frivolous, is always a consideration. You can take precautions, as you have done to enter into relationships using contracts/agreements, and conducting your business utilizing a corporate structure, as you did with the S-Corp. These precautions may enable you to successfully defend against liability in the suit, but the fact that someone is still taking a shot and including you personally as a defendant is just the way it is.

    The theory behind corporate entities, such as an S-Corp is that you are limiting your liability to that of your capital investment so long as you have acted in a manner that separates your business and personal activities. This is the "corporate veil", and when you are sued personally the plaintiff is seeking to "pierce the corporate veil" and attribute personal liability to your actions. You will, unfortunately need to defend yourself in this situation and possibly move to dismiss the case against you pesonally if in fact you kept your personal interests and assets separate from the business, maintained separate bank accounts, signed the agreements in your corporate capacity and not as an individual, and did not act in such a way as to allow the plaintiff to have cause to "pierce the corporate veil" and attach liability to you personally.

  2. Barry Neil Shrum

    Contributor Level 11

    Answered . From reading between the lines, my first observation is that the Texas court may not have personal jurisidiction over you. The Wikipedia link below gives a very good analysis of personal jurisidiction. If the court cannot gain personal jurisidiction over you, then it cannot render a verdict against you. If the company you contracted with was a Texas corporation and your contract designated Texas law, then that is probably enough to gain personal jurisdiction. This leads to my second observation that, absent any type of fraud or other tort on your part, or failure to adequately maintain your corporation records as distinct from your personal records, you are most likely improperly named as a defendant in this lawsuit. The plaintiff would be required to "pierce the corporate vail" in order to reach your personal assets (see the link below for more information about piercing the corporate veil). It is very important that you seek the advise of a litigator, someone who can help you sort through the facts and take the appropriate action. If you require legal counsel in Texas, depending on the area, I know a good lawyer down there. Just e-mail me and I will send you his contact info.

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