The first and best way to avoid personal liability for business debt is to form an appropriate business entity; you are fully responsible for any business debt incurred in a sole-proprietorship, while corporations and limited liability companies are separate and distinct legal entities that provide various levels of financial protection. If you and your business aren’t separate and distinct entities in the eyes of the law, you aren’t protected like you should be.
The corporate veil isn’t bulletproof
Forming a corporation or limited liability company won’t make you totally immune from personal liability. While the corporate veil provides for certain protections, shareholders, directors, members and managers can be held liable in circumstances ranging from the mundane to the egregious, such as:
- Failing to comply with the rules for forming your business entity, or failing to follow any corporate governance rules that apply to your entity (e.g., a corporation failing to hold an annual meeting).
- Commingling personal and business assets.
- Diverting company assets for personal use.
- Failure to maintain separate bank accounts for the business.
- Failure to provide or secure an adequate initial investment for operating capital.
- Personally guaranteeing payments of company debt.
- Acting as an individual in company communication or signing company documents as an individual instead of a representative.
- Using the company to engage in fraud, illegal or reckless acts.
In addition to these actions, directors, officers, members and managers can be held liable to employees for unpaid wages, governments for unpaid taxes, and even the company itself if shareholder payments were authorized without sufficient capital. Of course, the best ways to be held personally liable are to embezzle funds or profit from acting against the company’s interest.
Further, if you don’t make a distinction between your business and yourself, you invite others to do the same. If you are sued personally, there is no substitute for the counsel of an experienced business lawyer.
Alex Gertsburg is a managing partner at Gertsburg Licata. He may be reached at (216) 573-6000 or at [email protected].
Gertsburg Licata is a full-service, strategic growth advisory firm focusing on business transactions and litigation, M&A and executive talent solutions for start-up and middle-market enterprises. It is also the home of CoverMySix®, a unique, anti-litigation audit developed specifically for growing and middle-market companies.
This article is for informational purposes only. It is merely intended to provide a very general overview of a certain area of the law. Nothing in this article is intended to create an attorney-client relationship or provide legal advice. You should not rely on anything in this article without first consulting with an attorney licensed to practice in your jurisdiction. If you have specific questions about your matter, please contact an attorney licensed to practice in your jurisdiction.
