they are incorporated, so he himself isn't liable, the corporation's assets may be seized, but he should be fine

violating banking & money transmission laws can be a felony, which could make the officers of the corporation liable

if they were actually holding funds in a corporate account, and not just a front-end for paypal, they could be in a lot of trouble

unless, of course, they didn't do everything by the book, in which case the corporation could be found null and void and both could be personally liable.

If one of the officers of the corporation told paypal to lock the account that could be enough to pierce the veil of corporate liability if any of the parties owed money cannot retrieve their funds because of that.

This just sounds like a bad deal all the way around. If the two partners are as erratic as they now appear to be. I can't imagine that they were particularly fastidious when money was flowing in.

Makes you wonder how much they took in and how much of it is still left.

What about officers of the corp, aren't they also responsible?

I think that only applies if you do something illegal. What will probably happen is that they'll get sued, and as part of the settlement the company will be forced to pay out $_ million. Since the company probably won't have that, they'll end up declaring bankruptcy.

But then again I'm no lawyer

Only if they act illegally or irresponsibly, right? Otherwise only assets of the corporation are at risk.

holding customer funds without complying with banking laws is a federal crime - making them liable personally

you should tell paypal about that

paypal is a registered bank

Not in the US it isn't.

Not unless fraud is proven. Unfortunately, bad management is not punishable,