One of the primary benefits of organizing a business as a corporation (or similar entity) is limited liability protection. By establishing the corporation as a separate legal entity, its actions become distinct from the individuals running it. For the corporation’s shareholders, this provides downside certainty; the maximum liability exposure they face (in general) is the value of their investment. Since the losses stemming from personal liability are theoretically infinite, investors relish the corporate form’s ability to mitigate risk.
Because limited liability is highly desirable, however, some individuals use the corporate form for the sole purpose of avoiding liability, while knowingly carrying out business activities that create a high probability of liability. If the corporate form is strictly respected, this would leave plaintiffs with little or no way to recover for their injuries. This situation, where a corporation is created to defraud creditors or some other illegitimate purpose, is the basis behind the equitable doctrine of “piercing the corporate veil.” A distinct and often-conflated doctrine is the “participation theory” of corporate officer liability. Under this theory, a corporate officer or director can be held personally liable for the torts of the corporation that he participates in, and such liability is not predicated on a finding that the corporation is a sham or otherwise illegitimate. See Wicks v. Milzoco Builders, 470 A.2d 86, 89-90 (Pa. 1983). As such, corporate officers or shareholders can be held personally liable for their actions relating to the corporation, even if the corporation is an otherwise legitimate entity with sufficient capitalization.