2 ms·

if his name is on the paperwork, it doesn't matter.

jacquesm 16y ago
You are basically saying that there is no reason to incorporate, and that simply isn't true. Your name can be on the paperwork, your company can be in debt, it can even go bankrupt, as long as you did not do something called 'mismanagment' or 'fraud' you should be good. Being a minority shareholder implies that even if you had wanted you could not have stopped it from going the way it did, unless you happen to be a signing officer of the company able to act on his own, but that does not detract from the above. Puncturing the corporate veil to go after the private assets or credit status of an officer of the company is a very high threshold to meet, in the case of 'peanuts' debts like the one we are talking about here nobody in their right mind is even going to try. On top of that, he would have to be an officer of the company that has put up a personal guarantee for any of the debt to rub off, if you do that you're silly and I assume that since there is a corporate lawyer involved here and that the company is a Delaware corporation that he's well protected from that angle.
- damoncali 16y ago
  I'm not suggesting that at all. There are many good reasons to incorporate, including the ability to walk away from catastrophic debt. But there are personal consequences to doing so that the corporation can't do anything about. A real life example: I am involved in the management of a commercial real estate property. We turned down a prospective tenant because the owners' previous business had declared bankruptcy. How did we know about it? A simple credit report. If you're not seriously involved in the entity, then none of this matters, obviously. Side note: it's generally the norm for someone to personally guarantee a merchant account for a new business - I wouldn't call that silly.
  - jacquesm 16y ago
    > We turned down a prospective tenant because the owners' previous business had declared bankruptcy. How did we know about it? A simple credit report. In the case of a sole proprietorship I can see how that link would be made, but otherwise it is highly unlikely that a shareholder/officer would be affected in this way.
    - andjones 16y ago
      Any new company must boot-strap their credit (and credibility) in some way. Generally this is done by an officer or owner tying their credit with the company's credit. I own majority in a C-Corp and when applying for a merchant account I was asked to backup the company with my credit and SSN as well as sign for the company with its EIN.
      - jacquesm 16y ago
        Ok, so you voluntarily agreed to do that, and in that case it makes sense. But you were under no obligation to do that, and you being the majority shareholder is also a key element here. The OP is not a majority shareholder, as far as I can see has no obligation to go in to this now and it would be a very bad move indeed to get his name on any paperwork where he privately assumes the debt of the corporation just 'because his name is already on the paperwork'. It would make it easier, not harder to tie this to him in the future.
        tptacek 16y ago
        I think this "minority/majority shareholder" business is probably a misleading red herring. The point is that the company's creditors agreed to do business with a corporation, which is a separate legal entity from the officers of the corporation. Full stop. If you personally guaranteed any of the company's debts --- and don't ever do that --- the story is obviously different. But if Rackspace invoices your company, you could own 99.9999% of its shares and most probably not owe a dime. There are situations --- they vary from state to state --- that "pierce the corporate veil". Fraud is one of them, so is negligence, and so (in some crazy states) is payroll. What they tend to have in common is a tort: something an agent of the company explicitly did wrong to cause damages to another party. Signing a contract and not being able to live up to it is almost by definition not the same thing as a tort, which is why law students have separate classes in "torts" and "contract law".
        jacquesm 16y ago
        True, but if you're a sole proprietor that makes it a lot easier to go after you. A majority (but not sole) shareholder has a less hard time and a minority shareholder has nothing to worry about at all.

You are basically saying that there is no reason to incorporate, and that simply isn't true. Your name can be on the paperwork, your company can be in debt, it can even go bankrupt, as long as you did not do something called 'mismanagment' or 'fraud' you should be good. Being a minority shareholder implies that even if you had wanted you could not have stopped it from going the way it did, unless you happen to be a signing officer of the company able to act on his own, but that does not detract from the above. Puncturing the corporate veil to go after the private assets or credit status of an officer of the company is a very high threshold to meet, in the case of 'peanuts' debts like the one we are talking about here nobody in their right mind is even going to try. On top of that, he would have to be an officer of the company that has put up a personal guarantee for any of the debt to rub off, if you do that you're silly and I assume that since there is a corporate lawyer involved here and that the company is a Delaware corporation that he's well protected from that angle.

damoncali 16y ago
I'm not suggesting that at all. There are many good reasons to incorporate, including the ability to walk away from catastrophic debt. But there are personal consequences to doing so that the corporation can't do anything about. A real life example: I am involved in the management of a commercial real estate property. We turned down a prospective tenant because the owners' previous business had declared bankruptcy. How did we know about it? A simple credit report. If you're not seriously involved in the entity, then none of this matters, obviously. Side note: it's generally the norm for someone to personally guarantee a merchant account for a new business - I wouldn't call that silly.
- jacquesm 16y ago
  > We turned down a prospective tenant because the owners' previous business had declared bankruptcy. How did we know about it? A simple credit report. In the case of a sole proprietorship I can see how that link would be made, but otherwise it is highly unlikely that a shareholder/officer would be affected in this way.
  - andjones 16y ago
    Any new company must boot-strap their credit (and credibility) in some way. Generally this is done by an officer or owner tying their credit with the company's credit. I own majority in a C-Corp and when applying for a merchant account I was asked to backup the company with my credit and SSN as well as sign for the company with its EIN.
    - jacquesm 16y ago
      Ok, so you voluntarily agreed to do that, and in that case it makes sense. But you were under no obligation to do that, and you being the majority shareholder is also a key element here. The OP is not a majority shareholder, as far as I can see has no obligation to go in to this now and it would be a very bad move indeed to get his name on any paperwork where he privately assumes the debt of the corporation just 'because his name is already on the paperwork'. It would make it easier, not harder to tie this to him in the future.
      - tptacek 16y ago
        I think this "minority/majority shareholder" business is probably a misleading red herring. The point is that the company's creditors agreed to do business with a corporation, which is a separate legal entity from the officers of the corporation. Full stop. If you personally guaranteed any of the company's debts --- and don't ever do that --- the story is obviously different. But if Rackspace invoices your company, you could own 99.9999% of its shares and most probably not owe a dime. There are situations --- they vary from state to state --- that "pierce the corporate veil". Fraud is one of them, so is negligence, and so (in some crazy states) is payroll. What they tend to have in common is a tort: something an agent of the company explicitly did wrong to cause damages to another party. Signing a contract and not being able to live up to it is almost by definition not the same thing as a tort, which is why law students have separate classes in "torts" and "contract law".
        jacquesm 16y ago
        True, but if you're a sole proprietor that makes it a lot easier to go after you. A majority (but not sole) shareholder has a less hard time and a minority shareholder has nothing to worry about at all.