When do Business Owners Become Liable for Company Debt?

September 17, 2020
ventus

Typically, the most reliable indicator of whether or not you will be personally liable for your company’s debt has to do with the legal structure of the company itself. Sole proprietorships, which are the choice for many first-time entrepreneurs and small outfits, are quite easy to set up but do not offer protection for owners when it comes to personal liability. 

On the other end of the spectrum, corporations usually offer the greatest amount of personal protection for owners (shareholders). Of course, corporations are rather difficult to set up and require owners to operate a certain way to ensure that their personal finances stay shielded from the corporation’s creditors. For this and many other reasons, a hybrid entity like a limited liability company (LLC) is preferred by many entrepreneurs.

Piercing the Corporate Veil

Sometimes, this protection afforded to owners of a corporation or LLC, known as the “corporate veil,” can legally be pierced to handle some debts. Piercing the corporate veil is appropriate when a shareholder of a corporation or LLC member has abused the personal protections inherent in a corporation’s structure. For the corporate veil to be pierced in Florida, the following conditions must be satisfied:

  • The alleged wrongdoers abused the corporation’s structure to the point that it lost its independence. Essentially, the shareholders cannot be separated from the corporation. 
  • The shareholders (alleged wrongdoers) set up the corporation for the purpose of having their personal assets shielded from creditors. 
  • The alleged fraud caused injury to the creditor (plaintiff). 

Signing a Personal Guarantee

In certain situations where a business does not have many assets to offer as collateral, business owners will occasionally put up their personal money as guarantees in order to get a business loan. This is often the case when business owners wish to purchase real estate or lease property. 

Personal Liability for Business Partners

There are many ways that a business partnership can be structured. In a general partnership, for example, each partner is designated as a “general partner” which means that each partner could be held personally liable for debts of the partnership. Limited partnerships must have at least one general partner and one limited partner; the limited partner enjoys limited liability of his or her personal assets, while the general partner does not. There are two other types of partnerships in Florida: limited liability partnership (LLP) and limited liability limited partnership, which can extend limited liability to all partners in many situations. 

Choosing the best business structure for your startup means weighing several tradeoffs. While some entities might allow you to pass the entity’s profits through to your personal income, your personal assets might be similarly at risk if your business incurs debt. Only after a thorough consideration of your goals, objectives, and deal-breakers can you decide on the structure that is best for you and your startup. Bryant Taylor Law is well-equipped to help you start your business off the right way so disputes are kept to a minimum and profits to a maximum. Call us today at 954-282-9331 to receive a strategy session with our team.

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