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and, in a novel decision, pierced the corporate veil laterally, by combining all the corporations into
one for purposes of liability.
It is necessary to capitalize only for those liabilities normally encountered by corporations in the
industry. The word normally is key because it is obviously not necessary to have resources adequate to
handle any circumstance, no matter how unforeseeable. Also, adequate capitalization is necessary only
at the outset. A corporation does not expose its stockholders to personal liability by incurring
substantial losses and ultimately dissipating its initial capitalization.
A second argument used by creditors to reach stockholders for personal liability is failure to respect
the corporate form. This may occur in many ways. The stockholders may fail to indicate that they are
doing business in the corporate form by leaving the words Inc. or Corp. off their business cards and
stationery, thus giving the impression that they are operating as a partnership. They may mingle the
corporate assets in personal bank accounts, or routinely use corporate assets for personal business.
They may fail to respect corporate niceties such as holding annual meetings and filing the annual
reports required by the state. After all, if the stockholders don‟t take the corporate form seriously, why
should their creditors? They are entitled to adequate notice that they may not rely on the personal
assets of the stockholders. Even Phil, the software entrepreneur who imagined earlier holding his
stockholders‟ and directors‟ meetings in the shower, would be well advised to record the minutes of
those meetings in a corporate record book.
A third argument arises from a common mistake made by entrepreneurs. Fearful of the expense
involved in forming a corporation, they wait until they are sure that the business will get off the
ground before they spring for the attorneys‟ and filing fees. In the meantime, they may enter into
contracts on behalf of the corporation and perhaps even commit a tort or two. Once the corporation is
formed, they may even remember to have it expressly accept all liabilities incurred by the promoters
on its behalf. However, under simple agency law, one cannot act as an agent of a nonexistent
principal. And a later assignment of one‟s liabilities to a newly formed corporation does not act to
release the original obligor without the consent of the obligee. The best advice here is to form the
corporation before incurring any liability on its behalf. Most entrepreneurs are surprised at how little it
actually costs to get started.
Limited Partnerships
In the tradition of its hybrid nature, a limited partnership borrows some of its aspects from the
corporation and some from the general partnership. In summary, each general partner has unlimited,
joint and several, liability for the debts and obligations of the limited partnership after exhaustion of
the partnership‟s assets. In this respect, the rules are identical to those governing the partners in a
general partnership. Limited partners are treated as stockholders in a corporation. They have risked
their investment, but their personal assets are exempt from the creditors of the partnership.
However, as you might expect, things aren‟t quite as simple as they may initially appear. In limited
partnerships, it is rather common for limited partners to make their investments in the form of a cash
down payment and an agreement to contribute the rest at a later time. This occurs partly for reasons of
cash flow and partly for purposes of tax planning. This arrangement is much less common in
corporations, because many corporate statutes do not permit it and because the tax advantages