In our last newsletter, we discussed various federal laws that make persons in control of a business liable for unpaid payroll and other kinds of wage and withholding taxes. This article addresses additional areas in which business owners and officers may face liability for business debts.

Colorado has a specific law making officers and agents of a company liable for unpaid wages. Jerry McMorris, one of the owners of the Colorado Rockies and an officer of a failed trucking company, was recently held liable under this law for unpaid wages due truckdrivers of his failed trucking business. As Judge Nottingham observed in ruling in favor of the truckdrivers:

The apparent legislative purpose for including corporate officers within the statutory definition of 'employer' was to subject these persons to liability in the event that a corporation or similar entity failed to make wage payments. Its reason for doing so is obvious: corporate officers make decisions dealing with personnel matters and the expenditure of corporate funds, and the imposition of personal liability upon the corporate officers making these decisions provides a powerful motivator for such officers to pay wages while the corporation is still capable of meeting its obligations to its employees.

While the statute also holds "agents" of a business liable for unpaid wages, no court decisions define the scope of this term. Directors and key non-officer employees who control the payment of wages may be subject to liability, as well. If a business is struggling to pay its debts as they come due, care should be taken to insure that wages and related payroll taxes are paid on a timely basis, to avoid the risk of personal liability for them.

In addition to these statutes, courts around the country have held business owners liable for even non-wage debts of a business under a variety of circumstances. While the individual facts of these cases vary, the unifying theme is that the business owner treated the business assets as his personal assets, without paying due regard to the corporate shield the owner created. Where creditors have been harmed by this mis-use of assets, the "veil" of the corporation has been pierced to impose personal liability on the business owners for the debts of the business. This veil piercing may occur whether the business owner is one or more individuals, or another corporation. (In some circumstances, the business has also been made liable for the debts of its owner, a process known as "reverse piercing the corporate veil." Reverse piercing is disfavored in federal courts in Colorado.)

In organizing and operating their businesses, business owners should be aware that a significant combination of the following factors may result in the imposition of personal liability for business debts:

• funds flow freely between the owner and the business, without proper accounting and documentation;

• books and records of the business are not maintained in the ordinary course of business;

• personal debts of the owner are paid by the business, or vice versa;

• assets titled in the name of the owner are used by the business, or vice versa, without appropriate documentation or compensation;

• no directors or shareholders' meetings are held, or no minutes of such meetings are maintained;

• owner represents to third parties that the assets of the business are the owner's personal assets;

• the business is inadequately capitalized;

• the owner owns all or a majority of the stock of the business.

Courts have also held parent corporations liable for the debts of subsidiary corporations, under similar theories, considering the preceding factors and the following additional factors:

• the parent and subsidiary corporations have the same officers and directors;

• the parent finances the operations of the subsidiary;

• the parent pays salaries, expenses, or losses of the subsidiary;

• the parent refers to the subsidiary as a "division" or "branch";

• the subsidiary has substantially no business except with the parent, or no assets except those acquired from the parent;

• the directors or executives of the subsidiary fail to act independently in the interests of the subsidiary;

• the formal legal requirements of the subsidiary as a separate and independent corporation are disregarded.

Piercing the corporate veil claims typically arise when a business has failed, and the creditors are looking for another source for recovery of their unpaid claims. While these claims may be asserted against billion dollar publicly held companies, most frequently these claims are brought against owners of closely-held businesses who are intimately involved in their businesses' daily operations. Business owners should carefully document their transactions with their businesses, to avoid the appearance that personal assets have been commingled with business ones, and should otherwise maintain proper books and records for the business to limit the risk of personal liability for business debts.