Five Reasons Why a Business Owner May Be Held Personally Liable for the Company’s Financial Obligations
When you are the owner of a corporation or another business entity, your personal assets are generally safe from any form of legal action. This is due to the fact that your company is seen as a separate person under the law and, as such, is liable for its own actions.
However, there are a few reasons why you, as the owner, may potentially be held personally liable for your company’s financial obligations, such as:
Reason No. 1: Personally Guaranteed Bank Loans
If you’re a new business with no history of making on-time payments, a bank will usually require a personal guarantee for a loan. If you give the guarantee and your business falls behind, you will personally be on the hook for the balance.
Reason No. 2: Poorly Written Contracts
If not written or executed correctly, you could potentially be held personally liable for the fallout from any bad contracts. As such, from the very first paragraph of any contract, it should be clear that the agreement is between the other party and your company – not you. If it’s not clear, suggest an amendment or seek the help of a qualified attorney.
Reason No. 3: Taxes
Sometimes the government cuts right through the legalese and holds you personally responsible for business debts. One such case is payroll taxes. Should your company fail to withhold the right amount, there is a very good chance that you will be called to account, and your unprotected personal assets may be in peril.
Reason No. 4: The Corporate Veil
If your company isn’t keeping up with formalities like board of directors meetings, a court may pierce the corporate veil to permit creditors to come after you personally. As such, if you want to avoid being held personally liable for your company’s debts, you should ensure that your business remains compliant with its obligations under the law.
Reason No. 5: Fraud
If you commit fraud, no business structure will save you. Whether you’re an LLC or a C corporation, if you make fraudulent representations when applying for a business loan or line of credit, a judge will almost certainly allow the lender to sue you personally.
Should you create a company solely to further a fraudulent cause, you’ll end up in the same boat. A court won’t hesitate to expose you – and your family – to personal liability.
As long as you can avoid the five scenarios listed in this article, your personal assets should remain safe from legal action. Of course, if you need any help ensuring that your ducks are in a row, it is best to consult with an experienced attorney.