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Often, once the choice of whether to organize as a corporation or a partnership is made on the advice of counsel, small business owners will conduct their business in a personable, informal way.  The benefits of doing business this way are obvious – collegial, informal dealings avoid administrative hassles and foster better relationships.  Small business owners should be aware, though, that no matter how small their business, Georgia courts will hold them to the same rules as much larger companies, depending on how the business is legally organized.  The failure to abide by these rules can lead to personal liability of the business owners where the courts find wrongdoing.

Christopher v. Sinyard, decided by the Georgia Court of Appeals in 2012, involved a business that could not have been much smaller: a “two-man business” of residential construction contractors.

The business, Spellbrook Builders, contracted with Sinyard to construct a residence.  A dispute developed and Sinyard sued Spellbrook about an alleged guarantee made personally by one of Spellbrook’s officers.

Spellbrook was organized as a corporation, so that the business itself was recognized as an independent legal entity, separate from the two men who ran it.  Accordingly, a suit against the corporation would normally only allow a plaintiff to recover assets held by the business.

Sinyard decided, though, to attempt to “pierce the corporate veil.”  It is well-established under Georgia law that, where a business owner can be said to have disregarded the fact that the corporation is a separate entity, and where injustice would result from the court’s continuing to recognize the corporation, the plaintiff can recover not just from the corporation, but also from the individual personally.

The Court allowed the plaintiff to pierce the corporate veil of Spellbrook Builders because it found that the officer of Spellbrook was inappropriately trying to use the corporation to shield himself from the guarantee he undertook.  The Court noted that the two officers of Spellbrook had failed to do what the law requires of corporations.  Their missteps included the following:

–          Spellbrook’s owners had failed to file the required yearly registrations with the Georgia Secretary of State;

–          The two officers never signed the corporation’s bylaws;

–          No stock certificates were ever issued;

–          No meeting minutes of corporate meetings were ever kept; and

–          The lots on which Spellbrook built its homes were titled in the officer’s name and monies were moved between the corporation and the individuals, which amounted to an impermissible commingling of corporate and individual assets.

Though Spellbrook argued that they were a “two-man business” and that, as such, observing such formalities seemed burdensome, the Court held that the rules are the same for a two-man corporation as they are for a worldwide conglomerate.  Because the two officers of Spellbrook had commingled their assets with those of the corporation and had not treated the corporation like a separate entity, the Court allowed the plaintiff’s suit against the individual to proceed.

The administrative steps required of a corporation may seem overly complicated in small businesses, but Small business owners should take care to preserve the separateness of the corporation to shield themselves from potential liability.