Circumstances In Which You Are Personally Liable For Corporate Debt

  • Personally Liable For Corporate Debt

Circumstances In Which You Are Personally Liable For Corporate Debt

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There are situations in which the owner of a corporation or LLC might become personally liable for debts owed by the business. In that case, they need to file for personal bankruptcy rather than business bankruptcy advise lawyers of Dallas based bankruptcy law firm. Here are the situations which might lead to this situation:

Signing personal guarantee

An LLC is formed to restrict the owner’s personal liability for business related obligation. Usually, corporate shareholders and LLC members are not personally liable for business debts. However, most suppliers, banks, etc. do not extend credit without a personal guarantee from the owner which states that the debts will be paid by owner of the business cannot. Unfortunately, most business owners sign the contract as they are unable to get credit otherwise. In case you have signed a personal guarantee on any of your business contracts, the creditor can sue you for repayment.

Offering personal property as collateral

Generally, banks require small corporations or LLC owners to offer personal property as collateral for securing loan. In this case, you become personally liable for the debt. In case of a default, the creditor can foreclose on your property and use the proceeds to repay the debts. Though chapter 7 bankruptcy might remove personal liability for such loan, the lender’s lien on collateral survives. Thus, if you sell the property, you will have to pay off the debt.

Signing contract in your name

If you have signed purchase agreements and service contracts for your business in your name and not on behalf of the LLC or corporation, you are personally liable for the debt. in case you have your doubts, check the language of agreement and the signature box to know under which capacity you have signed (as owner or as officer).

Use of credit card or personal loan for business funds

If you have used either of these methods to obtain funds for your business, you are personally liable for the debts.

Tortious conduct

Usually, owners of LLC or corporations are not personally liable for management mistakes but in case of injury to others, this does not take place. An owner committing tort (legal term for harming another person or causing monetary loss) is held personally liable.

Fraud, inaccurate record keeping, or misrepresentation

While applying for loan for your corporation or LLC, if there was any misrepresentation, you could be held personally liable for the debts. Moreover, if there was no separation between your business and personal finances, creditors can hold you responsible for business debts. This is known as “piercing the corporate veil” and can be done by creditors by showing that legal formalities for LLC or corporations were not observed. Examples include having no minutes of a meeting where important business-related decisions were made, paying of business bills from personal accounts or vice versa.

The rules and formalities for business need to be followed by corporation and LLC owners if they do not wish to risk losing their limited liability protection. You can call (888-297-6203) to discuss your problem with experienced bankruptcy lawyers.