Incorporating Does Not Protect You from Your Own Negligence

We have written before about the chief reason for incorporating: liability protection. (Does a Corporation or a LLC Provide Better Liability Protection?) In the words of one New York court, “[o]ne of the primary legitimate purposes of incorporating is to limit or eliminate the personal liability of corporate principals.”[1] We were not surprised, then, when an attorney with his own practice recently called to have us form a corporation to protect himself from liability arising from the practice of law.

To be clear, however, corporate principals “may not be held liable on contracts of their corporations, provided they did not purport to bind themselves individually under such contracts.”[2] So, for example, if our solo practitioner hangs out his shingle and contracts, in the name of the firm, with a cleaning service to clean his office on the weekends, then he cannot be held personally liable for the performance of that contract.[3] But corporate principals can always “be held personally liable for torts committed in the performance of their corporate duties.”[4]

The liability of attorneys and other professionals for their own negligence (malpractice) has received special attention from courts and legislatures. For example, at one time, attorneys were not even allowed to incorporate their law practices because “many courts believed it was necessary to preserve to the client the benefits of a highly confidential relationship based on personal confidence, ability, and integrity,” and “[i]ncorporation was seen as possibly detracting from the professional accountability of an attorney.”[5] But barring attorneys from incorporating their practices denied them other “significant tax, insurance, and business-related benefits,” including limiting their liability on nonprofessional contracts.[6]

As a result, states passed laws allowing attorneys and other professionals, such as accountants and physicians, to form professional corporations.[7] From the beginning, however, “[p]rofessional corporations were never intended to protect attorneys [and other professionals] from their own misdeeds.”[8] Accordingly, courts have held, consistent with the rule applicable to corporate principals generally, that “professional corporations provide no protection from personal liability for an attorney’s own malpractice or obligations individually incurred by a breach of duty.”[9] Some states have even expressly written this rule into their statutes authorizing the formation of professional corporations.[10]

In sum, there are benefits to incorporating, principally protection from liability for the corporation’s debts. But insulation from suit for one’s own negligence or other tortious actions is not one of those benefits. Rather, a corporate principal, whether of a professional corporation or a corporation generally, can always be held liable for his own negligence, even if committed while acting in the scope of his duties for the corporation.[11]

[1] Bonacasa Realty Co., LLC v. Salvatore, 109 A.D.3d 946, 947, 972 N.Y.S.2d 84, 85 (2d Dep’t 2013) (internal quotation marks omitted); see also We’re Assocs. Co. v. Cohen, Stracher & Bloom, P.C., 65 N.Y.2d 148, 151, 480 N.E.2d 357, 359 (1985) (“A principal attribute of, and in many cases the major reason for, the corporate form of business association is the elimination of personal shareholder liability.”)

[2] Lido Beach Towers v. Denis A. Miller Ins. Agency, 128 A.D.3d 1025, 1026, 11 N.Y.S.3d 192, 193 (2d Dep’t 2015) (emphasis added); see also Young Seok Suh v. Superior Court, 181 Cal. App. 4th 1504, 1513, 105 Cal. Rptr. 3d 585, 593 (2d Dist. 2010) (“Persons are not normally bound by an agreement entered into by a corporation in which they have an interest or are employees.”); Ruggiero v. FuturaGene, plc., 948 A.2d 1124, 1132 (Del. Ch. 2008) (officers and directors are not liable on corporate contracts so long as they do not purport to bind themselves individually).

[3] See We’re Assocs. Co., 65 N.Y.2d at 151, 480 N.E.2d at 359 (New York law “preclude[s] the imposition of personal shareholder liability in instances not involving the direct rendition of professional services”).

[4] Lido Beach Towers, 128 A.D.3d at 1026, 11 N.Y.S.3d at 193 (internal quotation marks omitted); see also Asahi Kasei Pharma Corp. v. Actelion Ltd., 222 Cal. App. 4th 945, 966, 169 Cal. Rptr. 3d 689, 706 (1st Dist. 2013) (while corporate principals cannot be held vicariously liable for the corporation’s torts in which they did not participate, corporate director or officer status does not immunize a person from personal liability for his own tortious conduct); Prairie Capital III, L.P. v. Double E Holding Corp., 132 A.3d 35, 60 (Del. Ch. 2015) (a corporate principal “can be held personally liable for the torts he commits and cannot shield himself behind a corporation when he is a participant” (internal quotation marks omitted)).

[5] Sanders, Bruin, Coll & Worley, P.A. v. McKay Oil Corp., 1997-NMSC-030, ¶ 22, 123 N.M. 457, 943 P.2d 104.

[6] Id.

[7] See, e.g., Cal. Corp. Code §§ 13400-13410; Del. Code Ann. tit. 8, §§ 601-619; N.Y. Bus. Corp. Law §§ 1501-1516.

[8] Sanders, Bruin, Coll & Worley, P.A., 1997-NMSC-030, ¶ 22, 123 N.M. 457, 943 P.2d 104.

[9] Id. (collecting cases); see also id. ¶ 27 (“We hold that shareholder or member status within a professional corporation is not intended to confer upon an attorney protection from individual liability for the attorney’s own negligence or personal breach of duty.”).

[10] See, e.g., Del. Code Ann. tit. 8, § 608 (“Any officer, employee, agent or shareholder of a professional corporation shall remain personally and fully liable and accountable for any negligent, wrongful acts, or misconduct committed by such person, or by any person under such person’s direct supervision and control, while rendering professional services on behalf of the professional corporation to the person for whom such professional services were being rendered.”); N.Y. Bus. Corp. Law § 1505(a) (“Each shareholder, employee or agent of a professional service corporation and a design professional service corporation shall be personally and fully liable and accountable for any negligent or wrongful act or misconduct committed by him or by any person under his direct supervision and control while rendering professional services on behalf of such corporation.”). These statutes also make explicit the common-law rule applicable to corporations generally that a corporate principal “may be held individually liable to third parties for a corporate tort if he either participated in the tort or else directed, controlled, approved, or ratified the decision that led to the plaintiff’s injury.” Fletcher v. Dakota, Inc., 99 A.D.3d 43, 49, 948 N.Y.S.2d 263, 268 (1st Dep’t 2012) (internal quotation marks omitted).

[11] See, e.g., Peguero v. 601 Realty Corp., 58 A.D.3d 556, 558-59, 873 N.Y.S.2d 17, 21 (1st Dep’t 2009).