Grace Owen formed a corporation with three of her friends for purposes of operating a catering company. Grace used her own checking account to deposit the client payments and to make distributions of the corporation's profits to her three friends, who together owned 50% of the shares, with Grace owning the remainder of the shares. Grace promised her friends "no meetings, no formalities, we'll just run the catering business." Several wedding guests at a reception Grace's company catered became ill. Grace had not purchased insurance. The guests brought suit to recover their medical bills and other damages from Grace and her three friends. Grace says she has no personal liability for the bad food that resulted in their illness.

Question

Quizplus · Accepted Answer

Grace is incorrect because she failed to maintain the corporation's separate identity by using her personal account for corporate transactions and not following corporate formalities, which can lead to piercing the corporate veil and personal liability.

Grace Owen Formed a Corporation with Three of Her Friends