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:
- State: Texas
Answer:
When a small business incorporates as a C corporation, it becomes a separate legal entity from its owners, the shareholders. This means that shareholders are generally only liable for the corporation's debts up to the amount they invested, protecting their personal assets. Debts incurred by the corporation are the corporation's responsibility.
A corporation is managed by a board of directors elected by the shareholders. Directors have a fiduciary duty to act in the corporation's best interests, which includes duties of care, loyalty, and disclosure. If a director breaches these duties, they can be held personally liable for any damages to the corporation.
In your situation, the legality of your borrowing against the company depends on your authority as outlined in the corporate charter, bylaws, and any resolutions passed by the company. The bylaws govern the internal operations of the corporation, including how contracts are made and how financial decisions are handled.
Your business partner may have grounds to challenge your borrowing if it was not properly authorized or if it violates the bylaws. Factors such as whether your borrowing benefited you personally at the corporation's expense could be scrutinized. Courts will consider whether there was gross negligence or intentional misconduct when determining if a fiduciary duty was breached.
Given the complexities of your situation, including past personal relationships and trust issues, it may be wise to consult with a legal professional who can provide tailored advice based on your specific circumstances.
This content is for informational purposes only and is not legal advice. Legal statutes mentioned reflect the law at the time the content was written and may no longer be current. Always verify the latest version of the law before relying on it.