Debate This: S Corporations

Learning Goal: I’m working on a law discussion question and need an explanation and answer to help me learn.

    • Debate This: S Corporations
    • Chapter 33, p.802

William Sharp was the sole shareholder and manager of Chickasaw Club, Inc., an S corporation that operated a popular nightclub of the same name in Columbus, Georgia. Sharp maintained a corporate checking account but paid the club’s employees, suppliers, and entertainers in cash out of the club’s proceeds. Sharp owned the property on which the club was located. He rented it to the club but made mortgage payments out of the club’s proceeds and often paid other personal expenses with Chickasaw corporate funds.

At 12:45 a.m. on July 31, eighteen-year-old Aubrey Lynn Pursley, who was already intoxicated, entered the Chickasaw Club. Chickasaw employees did not check Pursley’s identification to verify her age, as required by a city ordinance. Pursley drank more alcohol at Chickasaw and was visibly intoxicated when she left the club at 3:00 a.m. with a beer in her hand. Shortly afterward, Pursley lost control of her car, struck a tree, and was killed. Joseph Dancause, Pursley’s stepfather, filed a tort lawsuit against Chickasaw Club and William Sharp. Using the information presented in the chapter, answer the following questions.

      1. Under what theory might the court in this case make an exception to the limited liability of share-holders and hold Sharp personally liable for the damages? What factors would be relevant to the court’s decision?
      2. Suppose that Chickasaw’s articles of incorporation failed to describe the corporation’s purpose or management structure as required by state law. Would the court be likely to rule that Sharp is personally liable to Dancause on that basis? Why or why not?
      3. Suppose that the club extended credit to its regular patrons in an effort to maintain a loyal clientele, although neither the articles of incorporation nor the corporate bylaws authorized this practice. Would the corporation likely have the power to engage in this activity? Explain.
      4. How would the court classify Chickasaw Club, Inc.—domestic or foreign, public or private?

Debate This:
The sole shareholder of an S corporation should not be able to avoid liability for the torts of her or his employees.

REPLAY THIS:

Shareholders usually enjoy protections from liabilities of the torts occasioned by the employees. They are immune from liability. This applies to all forms of corporations including S corporations. Nonetheless, under some circumstances, the protection from liabilities is disregarded. Under the theory or principle of Piercing the Corporate Veil, shareholders are held personally liable for the torts committed by the employees (Mann & Roberts, 2018). The theory requires courts to pierce the corporate veil and hold the shareholders liable. This is because they have misused the corporate privilege that held them immune from liabilities. Under this theory, in an S corporation, a sole shareholder should not be able to avoid liability for the tort of the employees (Mann & Roberts, 2018). This is because the abuse of corporate privilege has happened for the personal benefit of the shareholders. Essentially, S corporations with a sole shareholder are indistinguishable from the shareholder (Mann & Roberts, 2018). Considering this, the shareholder cannot be treated separately from the corporation’s operations. The Chickasaw Club, Inc.’s operations were an abuse of corporate privilege and power. Under the doctrine of Piercing the Corporate Veil, William Sharp would be held liable for the failure of employees to check Pursley’s age. He would be liable for their actions of selling her alcohol that made her highly intoxicated leading to the accident. Indeed, their actions happened for the benefit of Sharp. This is evident because, among other things, Sharp paid his personal expenses from the corporate funds. He maintained the corporation’s checking account. Chickasaw Club, Inc. operates as a private entity. When the employees’ tort is for the benefit of the shareholders, it would be an injustice for the shareholders to avoid liability (Mann & Roberts, 2018). In S corporations, there is only one shareholder. That shareholder should be held liable for the torts of employees.

Reference

Mann, R. A., & Roberts, B. S. (2018). Smith & Roberson’s Business Law. Boston, MA: Cengage Learning.

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