What is My Personal Liabity for Borrowing money from a Corporation I hold a Minority Interest in.

Full question:

I am a 25% shareholder of a small business (annual revenue of $1.3 million)and I have borrowed against the company in an amount of about $45 K (over a period of 4-5 years). I have now shared this info openly with my business partner (75% shareholder) and have begun repayment of $1000 per month. I originally did not have a lot of concern about my actions because the company owed me about $90 k in deferred wages, however I have come to learn from my business partner that we apparently wrote that off the books a few years ago. I was unaware of that. We have been in business (C-Corp) since 1998 and used to be in a personal relationship. During the last 4-5 years he betrayed my trust (engaged in a long term affair with an employee - even took her on personal trips under the guise of company business on company funds). I confronted him regarding the affair and the potential impact it has/had on our company several times over the years (the employee no longer is with the company however the impact of the relationship on the company while not quantifiable in dollars is/was huge - morale, PR - as they were not discreet). I am concerned as to what his rights are regarding my 'borrowing', how he may legally approach this if he decided to do something, what challenges I have created for myself and what my rights are in this situation. We are both instrumental to the on-going success of our business, the business is now on a much better track sales and revenue-wise since the employee that he had an affair with is gone, however I remain concerned. I look forward to your response. Thank you.

• Category: Corporations
• Date: 04/07/2025
• State: Texas

Answer:

When a small business incorporates, it is automatically a C corporation, also called a regular corporation. The most basic characteristic of the corporation is that it is legally viewed as an individual entity, separate from its owners, who are now shareholders. This means that when the corporation is sued, shareholders are only liable to the extent of their investments in the corporation. Their personal assets are not on the line, as they would be if the business was a partnership or sole proprietorship. Any debts that the corporation may acquire are also viewed as the corporation's responsibility. In other words, once the business is incorporated, shareholders are protected by the corporate veil, or limited liability.

A corporation is governed by a board of individuals known as directors who are elected by the shareholders. Directors may directly manage the corporation's affairs when the corporation is small. Directors usually receive a salary for their work on the corporate board, and directors have a fiduciary duty to act in the best interests of the corporation. These fiduciary duties require the directors to act with care toward the corporation, to act with loyalty toward the corporation, and to act within the confines of the law. A director who breaches this fiduciary duty may be sued by the shareholders and held personally liable for damages to the corporation.

In a corporation, the president owes to the members of the company the duty of care, loyalty, and disclosure. Each officer is expected to always act in the best interest of the company as a whole and avoid any potential conflicts of interest with the company.

It will be a matter of subjective determination for the court to determine whether there was a breach of fiduciary duty, based on all the facts and circumstances involved. Some of the factors that may be considered include, among others, whether the fiduciary personally benefitted at the expense of the company, or failed to disclose information to the company's detriment. For example, were funds diverted to personal use? Was there knowledge of financial misdealings or risk factors that weren't disclosed by the fiduciary? In applying the statutory standards for the duty of care owed by a corporate officer, the court will need to determine whether there was gross negligence, reckless conduct, intentional misconduct, or a knowing violation of law. The standards of care are measured against the subjective interpretation of how a "reasonable" person would act in similar circumstances.

Before doing business, stock certificates should be issued to all stockholders, and a corporate record book should be established to hold the articles of incorporation, records of stock holdings, the corporation's bylaws, and the minutes of board and shareholder meetings. In addition, such meetings should be held regularly (once a year is the minimum requirement). In this way, the corporation can record all important actions taken and show that such actions were approved by a vote. It is also important to treat the corporation like the separate entity it is by keeping personal and corporate accounts separate.

Whether the corporation may take action for the borrowed funds depends in part on your borrowing authority according to the corporate charter, bylaws and resolutions of the company. The bylaws of a corporation are the internal rules and guidelines for the day-to-day operation of a corporation, such as when and where the corporation will hold directors' and shareholders' meetings and what the shareholders' and directors' voting requirements are. Typically, the bylaws are adopted by the corporation's directors at their first board meeting. They may specify the rights and duties of the officers, shareholders and directors. They may also specify how the company may enter into contracts, transfer shares, hold meetings, pay dividends and make amendments to corporate documents. They may specify a fiscal year, how the corporate seal is to be used and which offices are required. Most states do not require bylaws to be filed with the state office.

A corporation's profits are divided on the basis of stockholdings. In other words, if a stockholder owns 10 percent of the corporation's stock, she may only receive 10 percent of the profits. Strict rules govern the way corporations divide their profits, even to the point, in some states, of determining how much can be distributed in dividends. Usually, all past operations must be paid for before a dividend can be declared by the corporation's directors. If this is not done, and the corporation's financial stability is put in jeopardy by the payment of dividends, the directors can, in most states, be held personally liable to creditors.