As a small business owner, am I responsible for my company's debt? If I am, is there any way to reduce that liability?
· A lot of details to address
1. What type of business in this individual operating
2. What sort of debt does the business hold
3. Did the owner sign a personal guarantee
4. In rare circumstances, courts can pierce the corporate veil
· So there are a lot of scenarios where an owner may face liability for company debt.
What sort of effect does the type of business have on whether or not an owner is liable for company debt?
· Partnerships and sole proprietorships are inseparable from their owners so the owners wills be personally liable for corresponding debt of obligation
· Operating the business as a limited liability company or an LLC, corporation, or even a limited partnership will resolve this issue.
· These entities receive liability protection from state in exchange for following laws and regulations.
· But even with an LLC, corporation, or limited partnership, the owners may face liability if they have personally guaranteed any debt of the business.
How does a personal guarantee work?
· Personal guarantee explanation and example.
· Allows the lending institution two routes for recovery
· But in other circumstances, the issue of piercing the corporate veil may arise.
What exactly is piercing the corporate veil?
· Court disregards the corporate entity.
· And broadly speaking, a court will pierce through this liability protection when the business is used to defeat public convenience, to justify a wrong, to protect against fraud, or to defend a crime.
How can businesses ensure that this doesn't happen to them?
· Observe corporate formalities; i.e., have officers, corporate records, and shell company
· It's equally as important that the business is well capitalized for the purposes of its business endeavors and certainly not insolvent. If an owner is siphoning funds out of the business to avoid paying a debt or judgment, a court may certainly find the business' owner responsible for paying that debt.