You're Personally Liable for Business Debt After Signing a "Personal Guarantee" Start by checking whether you signed a "personal guarantee"—a contract promising to pay on behalf of the business. This is a regular practice when a new or established business with few assets asks for credit.
If your business falls under the sole proprietorship structure, you and your business are legally the same. So if you incur business debts, the creditors can legally come after you for payment. In the case of a general partnership, the matter is the same. Each partner owes 100% of the debt the business fails to pay.
Sole trader structure
A sole trader is a person running a business in their own name; bearing all the rewards and the risks. Typically, sole traders have unlimited liability for all business debts and any litigation. A sole trader structure has no legal distinction between the business and the owner.
The short answer to this question is yes, you are potentially at risk of losing your personal assets if your business is sued. Depending on how your business is structured, a lawsuit could put your personal assets in jeopardy if the creditor goes after them to satisfy the debt or judgment.
Depending on the state, a company may be required by law to have legal representation. Individuals, by contrast, can sue without the help of a lawyer. However, speaking with a business lawyer about your case is always a good idea.
At the federal level, individuals are regularly found personally liable for violations of the Fair Labor Standards Act (FLSA), the Family Medical Leave Act (FMLA), Section 1981 of the Civil Rights Act, the Uniformed Services Employment and Reemployment Rights Act (USERRA), the Employee Retirement Income Security Act ( ...
Unlimited liability typically exists in general partnerships and sole proprietorships. It provides that each business owner is equally responsible for whatever debt accrued within a business if the company is unable to repay or defaults on its debt. An owner's personal wealth can be seized to cover the balance owed.
Directors are not made personally liable for the debts of their limited company in the vast majority of situations. This is because limited companies have the benefit of limited liability.
A sole proprietor may delegate decision-making authority to employees and independent contractors, but is ultimately the person responsible for the business' liabilities, debts, and tax obligations, for example.
If Your Business is a Sole Proprietorship or Partnership
If you default on a personal debt, creditors can go after your business assets to recover what's owed. Similarly, if your business incurs debt, your personal assets (like your home or car) may be at risk.
Suing an LLC with no assets is possible, but often unproductive financially. LLCs shield owners' personal assets, so winning may not yield payment. If you're wondering whether having no assets protects you from lawsuits against your LLC, it's important to understand the limitations.
As a sole proprietor, your house, car, and other personal possessions could be seized to pay for the debts your company has incurred. On the other hand, if your business is a corporation or a limited liability company (LLC), you can escape personal losses if your business fails.
Unlimited Liability: Sole Proprietors and General Partners
The business debts belong to each partner personally with this added twist: Each partner is personally liable for 100% of the business's debts, not just the share that represents each partner's ownership percentage.
Thus, in principle, the company, alone, is responsible for the debts incurred in the running of the company and the creditors are, in principle, precluded from looking to the entrepreneur for payment of any shortfall arising as a result of the company's insolvency.
If a business is organized as a corporation, limited liability company (LLC), or other type of separate legal entity, the owner is not liable for the debts of the business unless other conditions exist.
When a company enters liquidation, it provides its books and records to the liquidator. The liquidator goes through those records and decides a date where the company first became insolvent. If the records show any debts incurred after that date, the directors can be held personally liable for those debts.
As a board member, you could be held personally liable for the decisions and actions of the board, even in the case of impropriety on the part of other members. A lawsuit might name everyone at an organization, including board members, before a determination is made.
A resigned director won't be held indefinitely liable for all their previous actions. If the company is insolvent, the insolvency practitioner can investigate your conduct going back three years prior. If there has been a breach of fiduciary duty, the company has up to six years to take legal action against you.
Sole Proprietorship
The owner shares in the business's profits and losses. Since the sole proprietor is self-employed, self-employment taxes must be paid. There is no liability protection for the owner. The owner is liable for all debts.
A limited liability company or LLC is a business entity that offers limited liability protection, which limits an owner's responsibility for business debts and other liabilities only to what an owner has invested in the LLC.
After some time, owners can then direct activities of sales or production employees to better meet the objectives. In general, business owners are responsible for the growth, stability, direction and daily operations.
By running your business as a corporation instead of a sole proprietorship, you generally protect yourself from personal liability for the business's actions or debts. In essence, the corporate veil ensures that the business and its owner are treated as distinct legal entities.
Exclusion of liability is a contractual term stating you will not be liable to pay compensation if a certain event occurs. You usually need to make contract terms with clear wording. If a term is particularly onerous, you should bring this to the other party's attention. If not, you may not be able to enforce it.
If the court allows the plaintiff to pierce the corporate veil, the owners, members and shareholders become personally liable for the company's debts. This allows creditors to use the business owners' personal assets, such as their homes, bank accounts, investments and other property.