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Shareholder Liability for Corporate Obligations in Small Business

  • Deana Nance

    (Louisiana Tech University)

  • Joseph D. Vu

    (DePaul University)

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    This paper discusses the issue of shareholder liability for corporate obligations in small business. Although the law allows individuals to incorporate their businesses to limit liabilities, the courts have in many cases pierced the corporate veil and held shareholders liable for obligations of the corporation. The doctrine of piercing the corporate veil rarely affects shareholders of publicly-traded firms. In most cases, this doctrine would only reach shareholders of small, closely held firms. While fraud or unjust intent provide reasons for the court to disregard corporate entity, oftentimes the honest but uninformed actions of shareholders are to blame. To maintain limited liability, shareholders of small businesses must act in accordance with die corporate form of ownership in representing the firm, managing the firm’s assets, and financing the firm.

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    Article provided by Pepperdine University, Graziadio School of Business and Management in its journal Journal of Small Business Finance.

    Volume (Year): 2 (1993)
    Issue (Month): 2 (Spring)
    Pages: 175-182

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    Handle: RePEc:pep:journl:v:2:y:1993:i:2:p:175-182
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    1. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    2. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
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