Does a Corporation Really Protect its Shareholders Against Personal Liability?

Not always.  A recent Michigan Court of Appeals decision (New Properties vs. Lakes of the North Association) held that money owned by a corporation could be seized to satisfy the debts of its owners. 

In most cases, a corporation's assets cannot be seized to satisfy a judgment against its owners (and vice versa) because the corporation and its shareholders are considered to be separate parties.  However, in some cases a corporation's assets may be seized to satisfy the debts of its owners.  This is known as "piercing the corporate veil". 

The Court in the New Properties case reviewed numerous factors which led to the conclusion that the corporation should not be treated separately from its owners:

1. The owner never kept a minute book
2. The owner did not treat corporation accounts separately
3. Financial arrangements between the corporation and owner were not documented
4. Shareholder or director meetings were not held by the owner
5. No stock certificates were issued
6. The company owned no property or capital

The bottom line is that the owner of the corporation did not treat the company as a separate entity, so the Court found no reason to do so either.  As a result, the plaintiffs were entitled to recover their judgment against a corporation that was even not a party to the case. 

The lesson learned for all business owners is to respect the formalities of corporate structure.  Otherwise, a corporation (or limited liability company) may not provide the protection from creditors that they expect.