Do Shareholders Get Automatically Sued When a Company Is Sued?

When a company finds itself in legal trouble, a common question among shareholders, investors, and business owners is whether the shareholders themselves will also face legal repercussions. The answer is no, typically they do not get automatically sued when a company they own faces legal challenges. This is a significant benefit of corporate personhood and the legal separation between the corporation and its shareholders.

Understanding Corporate Structure

For clarity, it’s important to understand that in most jurisdictions, a "company" generally refers to any entity or collective that conducts a business. "Shareholders" are the individuals or entities that own shares of a "corporation," which is a specific type of company under the law. The essence of a corporation is its separate legal entity status. This means that in the eyes of the law, the corporation itself is considered a distinct legal entity.

Corporate Personhood and Entity Separation

The concept of "corporate personhood" is a powerful legal principle that grants corporations many of the rights and protections afforded to individuals. One of the key benefits is the doctrine of separation of entity or 'corporate veil.' This principle asserts that the corporation, and not the individual shareholders, is the legal entity that can be sued. For instance, if a company like Twitter is sued, you would be suing the entity (Twitter) and not its individual shareholders.

Two Separate Legal Entities

In legal terms, a corporation is a separate legal entity from the collective of its shareholders. This means that when a corporation is sued, the judgment is typically limited to the corporation's assets and not the personal assets of the shareholders. If the corporation's assets are insufficient to cover the judgment, the shareholders are generally not held personally responsible.

Key Exceptions to the Rule

It is important to note that there are indeed exceptions to the principle of entity separation. These exceptions can occur under specific circumstances, such as:

Alter ego doctrine: This doctrine may be invoked if the shareholders have commingled corporate and personal assets, or if the corporation is used as a tool for deceptive or fraudulent purposes. In such cases, a court may pierce the corporate veil, meaning that the shareholders' personal assets may be held liable. Prohibited actions: If shareholders engage in actions that are illegal or in breach of their fiduciary duties, such as fraud or misappropriation of company funds, they may be held personally liable. This is rare but can happen under specific circumstances.

Conclusion

Shareholders do not get automatically sued when a company they own is sued. This is a significant benefit of corporate personhood and the legal separation between the corporation and its shareholders. Understanding the separation of entity can help protect individual shareholders from legal liabilities related to the company's actions. However, it's important to be aware of the exceptions where the corporate veil might be pierced.

For more insightful analyses and detailed legal advice, consult with a legal professional.