n a recent case, California’s Appellate Court used the Responsible Corporate Officer Doctrine (“RCOD”) to hold officers personally liable for $2.5 million in environmental penalties. In People v. Roscoe (Cal. Ct. App. 2008, WL 5378254) the court held the corporate officers personally liable, without piercing the corporate veil, for civil violations.

This is a significant departure. The RCOD has been used before in California to hold responsible corporate officers personally liable for their company’s violations of strict liability public welfare statutes. In the past the doctrine was only used for criminal violations of state statutes. But now, as this new case indicates, California will use the RCOD for civil violations.

In the Roscoe case, Ned and John Roscoe owned and operated an underground storage tank in Galt, California through a corporation called the Customer Company. When their tank leaked 3,000 gallons of gasoline into the ground the Roscoe’s notified the Sacramento County authorities and hired an environmental consultant to take care of the remediation. When the cleanup did not happen quickly enough the county sued the Customer Company and the Roscoes. While the court did not find enough evidence to pierce the corporate veil, (the Roscoes had followed corporate formalities) it did use RCOD to hold the Roscoes personally liable for $2.5 million in civil penalties.

The Roscoe case illustrates the hazards of doing any sort of environmental related business in California. Regulators in California are free to seek huge cumulative penalties using their per-day and per-violation fine system. (Note that the Roscoes identified the problem to the county and hired someone to clean it up but it wasn’t fast enough for the regulators, thus the run up in fines.) And now the California courts are backing up the regulators by assessing personal liability against officers – even when the corporate formalities have been followed.

If you must do business in California involving any sort of environmental regulations be certain to have the systems in place to deal with such risks. More broadly, if you do any sort of business in California whereby administrative penalties may be assessed, be aware that California regulators and courts may someday seek to hold you personally liable as a responsible corporate officer. As if there weren’t already enough reasons to leave California…

Contact me to make sure you are protected.

n times of uncertainty many owners of corporations and LLCs may consider folding up their operations. CPAs and other advisors may suggest dissolving these entities to save on fees and to be done with it all.

But hold on: The “easy” route of dissolution can have significant negative consequences.

In California, for example, shareholders can be held personally liable for corporate obligations arising before or after a dissolution. The rule is found in California Corporations Code §2011. The same rule exists for LLC members pursuant to California Corporations Code §17355.

The deadline for suing corporate shareholders or LLC members in California is either; 1) the applicable statute of limitations period or, 2) four years after the entity’s dissolution, whichever is earlier. Since many statutes of limitations in a business context can be four to six years in length, you may have four years of worries until you are safe from litigation. And don’t think that because you have a Nevada or Wyoming entity qualified to do business in California you are in the clear. California courts are notorious for applying “their” law to out of state entities doing business in California.

So what is the solution?

Do not dissolve your entity. Keep it alive until the statute of limitations period has run.

Here is an example of why it makes sense to keep your entity alive.

Joe owns Merced Consulting, Inc., a Nevada corporation qualified to do business in California. With a downturn in the economy Joe’s consulting business has suffered. His CPA suggests dissolving the corporation and eliminating the expense of an extra tax return. The CPA says his other consulting client Mary has just dissolved her entity.

But what happens in a downturn? People start to file claims over old business disputes, whether real or imagined. In good times when the money is coming in, grievances may be overlooked. In tougher times people will sue. And with business contract statutes of limitations typically being six long years, plenty of Joe’s clients may be looking for a new pocket to dip into to help pay for their current troubles.

In fact, Joe had provided Tom with project development help on a condo complex. Joe’s projections were based on the real estate market as it existed in 2006. The picture is quite different today, and Tom is suffering for it. Tom hires an attorney to sue Joe, Mary and two other consultants for their “bad” advice.

What are the consequences?

Mary, who dissolved her entity and received a distribution of corporate assets, is now personally liable for Tom’s claim.

Joe, who listened to his attorney and did not dissolve, is still protected by his corporation. While the entity does not hold a lot of assets, if Tom gets a judgment against Joe’s corporation he only gets what is inside the entity. Not much. And Joe’s personal assets are protected from the claim.

Dissolving gives a plaintiff a hopeful shot at your personal assets. Keeping your entity alive until the statute of limitations periods have run discourages plaintiffs from even filing in the first place.

Be careful in heeding the siren call of reduced filing fees and fewer tax returns by dissolving. In our current environment asset protection is more important than ever, and can only be achieved by keeping and maintaining your protective entities in place.

Garrett Sutton, Esq. is a corporate attorney and is the author of “Own Your Own Corporation” and other titles in the Rich Dad Advisor series. His firm forms and maintains corporations, LLCs and other entities and may be reached at www.corporatedirect.com.

Quick question: When you hear the phrase “Board of Directors” do you think of Fortune 500, Mega-Sized, enormous conference table companies?

Show of hands?

It sounds impressive to have a Board supporting you. To provide direction, guidance and support to you and your business. But that’s just for the big guys, right?

What if you - small business entrepreneur - could have your own Board of Directors, AND stay the size you are?  Receive all the support and benefits the big guys do without the “bigness” of the big guys?

Enter the “Virtual” Board of Directors.

Any business can have a Board of Directors - a set of respected professionals who serve in an advisory capacity for your business. Yep, even you.

Why should you have a Board of Directors?

1. Reality Checks - Board members can bring your feet back to the ground wen you are flailing, unfocused or scattered (it happens to the best of us). They’ll keep you on track so you don’t lose traction.
2. New Insights - When Board members from different backgrounds, have different experiences.  They’ve seen different successes and failures, and have different ideas you can use in your business.
3. Provides Stability - Financial folks like when small businesses have support from seasoned professionals. It gives them confidence knowing you’re not out there on your own.

You may be wondering “why would somebody do that for me? Who am I to ask that of another professional?”

First things first….who are you not to ask that of another professional? You’re no less important than any other entrepreneur.

So, why would they agree to be on your Board?

1. Networking - being on a Board allows fellow members networking opportunities with other professionals. Make your Board appealing to other members so they’ll want to join you, and they will also benefit from the experience.
2. Leadership Experience - Professionals are continutally seeking leadership opportunities. Boards are great ways to do that.
3. Honor - What an honor to be asked to be on a Board, particularly by a business owner who is taking the initiative to take their business to the next level!

What types of industries should the professionals on your board represent? The usual suspects are industries like finance, law and human resources. Don’t forget about asking other successful entrepreneurs who have navigated the waters and make it (in non competing industries, of course). They have great insights on how to make it through the tough times, how to grow, and how to make the most of the high times.

How can a Board serve your business?