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One of the main reasons people form a corporation or a limited liability company LLC is to limit their personal liability for company debts. However, there are many ways to become responsible for company debts. Read on to learn more about when you might be held personally liable for debts incurred by your corporation or LLC. When you form a corporation or an LLC it becomes a separate legal entity apart from its owners. This means that the business itself can own assets, enter into contracts, and is liable for its own debts.
If the corporation or LLC cannot pay its debts, creditors can normally only go after the assets owned by the company and not the personal assets of the owners. However, the business owner can also be held responsible for corporate or LLC debts in certain situations. Below, we discuss how this can happen. If you cosign on a business loan, you are as equally responsible as the corporation or LLC to pay it back.
This is usually the simplest way to voluntarily make yourself liable for your company's debts. Similarly, if you personally guarantee an obligation of the corporation or LLC then the creditor can come after your personal assets if the business defaults on the loan.
If you have a new company or your company does not have many assets, a creditor may require you to provide some sort of collateral before approving the loan. If you agree to pledge your house or other personal assets as collateral for the business loan, the creditor may be able to take your property and sell it to satisfy the obligations of the company.
Because the S Corp itself is not a taxable entity itself, its shareholders could be held responsible for any taxable income generated during and after the bankruptcy proceedings. You must be logged in to post a comment. Bankruptcy and Your S Corporation: What are your options? By signing a personal guarantee, that individual—not the corporation—is the party to the contract and, in effect, voluntarily gives up her limited liability protection.
If the corporation doesn't make the payments, the owner is legally responsible. The same holds true if an owner signs a business contract in her name. If the corporation fails to comply with the terms of the contract, the owner who signed is personally responsible. Fraud, wrongful, or criminal acts. If an owner willfully commits a fraudulent, wrongful, or criminal act, she can be held personally responsible.
For example, if the owner willfully sells a defective product, misrepresents the business when applying for a loan, or assaults someone, the courts strip away the owner's limited liability protection and hold her personally liable. Note that the corporation can also be held liable if the owner was acting on its behalf at the time.
Corporate formalities. For example, if an S corporation fails to follow the formalities and recordkeeping requirements set out in its state's corporate statutes—such as holding annual meetings, keeping accurate minutes, adopting corporate bylaws, or making sure the officers follow the bylaws—the courts may rule that the corporation doesn't exist and the owners aren't entitled to limited liability protection.
To avoid such problems, always make sure the corporation is in compliance with state regulations governing the formation and running of an S corporation. Commingling assets. It is important to maintain a distinct separation between business and personal financial accounts and not commingle, or combine, them. Otherwise, creditors can ask the courts to pierce the corporate veil and hold each owner personally responsible for the business's debts.
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