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Law Educator, Esq.
Law Educator, Esq., Attorney
Category: Business Law
Satisfied Customers: 118238
Experience:  All corporate law, including non-profits and charitable fraternal organizations.
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My partner and I own a small business. Recently we had 2

Customer Question

My partner and I own a small business. Recently we had 2 fires (!) 2 weeks apart.
The first fire was determined to be an accident in the wiring of the building wall and not our fault. The second seems to have been from an overloaded power strip and likely our fault. (We are awaiting official reports.)
We moved into this office 3 years ago and our lease it states that we should have insurance. (We did at our previous office) My partner forgot to get the insurance! (He wasn't being cheap, he really just forgot, and the building never asked for proof as our previous office did.)
The building asked us to leave and we signed a letter that we would not sue each other.
2-3 other offices may have sustained damage as well mainly due to the water from the fire dept.
We are a small company with no assets and actually are in debt.
Here are my questions.
1 - Can my partner and i be sued personally? We are incorporated.
2- As the company is in debt and has no assets, would it pay for anyone to sue us?
3- Would we be better protected if we close the company and restart as another?
I'm sure we'll get contacted by insurance companies soon. Should we respond?
(A friend with a legal background told me that my partner and I are not personally responsible as we are protected by incorporation and since we have no assets and just debt, that it wouldn't pay for anyone to sue us. )
For now, this is all we need to know.
Anything you may add would be helpful.
Submitted: 1 year ago.
Category: Business Law
Expert:  Law Educator, Esq. replied 1 year ago.

Thank you for your question. I look forward to working with you to provide you the information you are seeking for educational purposes only.

What state are you located in?

You are a corporation (I am just clarifying since you said you are incorporated)?

Customer: replied 1 year ago.
We're in NY.
Yes, we're incorporated.
Expert:  Law Educator, Esq. replied 1 year ago.

Thank you for your reply.

New York Supreme Court holds that the general rule that “a corporation exists independently of its owners, who are not personally liable for its obligations, and that individuals may incorporate for the express purpose of limiting their liability.” In order to pierce the corporate veil and impose personal liability on the owners for the obligations of the corporation, the plaintiff “must demonstrate that a court in equity should intervene because the owners of the corporation exercised complete domination over it in the transactions at issue and, in doing so, abused the privilege of doing business in the corporate form, thereby perpetrating a wrong that resulted in injury to the plaintiff.” The court identified the “failure to adhere to corporate formalities, inadequate capitalization, commingling of assets, and use of corporate funds for personal use” as factors to be considered when determining whether the corporate veil should be pierced. Absent fraud, the court would also allow piercing of the corporate veil “when a corporation has been so dominated by an individual [. . .] and its separate entity so ignored that it primarily transacts the dominator’s business instead of its own and can be called the other’s alter ego.” In order to succeed on a veil-piercing claim, the plaintiff need not specifically plead fraud, but must show that “the individual defendant’s control of the corporate defendant was used to perpetrate a wrongful or unjust act toward plaintiff.” See: Agai v Diontech Consulting, Inc. - 2013 NY Slip Op 51345.

This means that in general you would not likely be held liable, although they could try to pursue you personally by proving the factors above. If the company has no assets, then you cannot just walk away from it, you have to properly close it and thereby seek to extinguish its debts. You would do so by winding up the company and filing for bankruptcy. The bankruptcy would extinguish any suits or debts against the company and protect you from personal liability in most cases. Failure to properly wind up the company could make you and your partner personally liable.

If you do wind up and put the company into bankruptcy, then the debts or suits against you would be extinguished and you would likely walk away owing nothing. Then you can open a new corporation to start back into business.