If you get a summons notifying you that a debt collector is suing you, don't ignore it. If you do, the collector may be able to get a default judgment against you (that is, the court enters judgment in the collector's favor because you didn't respond to defend yourself) and garnish your wages and bank account.
You and your business are equally liable for debts incurred by the company. Since a sole proprietorship does not offer limited liability to its owner, creditors of the business can go after your personal and business assets.
One such situation is somewhat obvious but often overlooked – a person, including a shareholder or officer, can be held liable for the debts of a corporation if he or she has agreed that they may be held personally liable.
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.
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.
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.
How can business owners avoid personal liability from business debts? Besides selecting a business entity that will protect them from personal liability, such as a corporation or limited liability company, business owners should avoid signing personal guarantees, if it all possible.
Members are not liable for an LLC's debts or obligations. Members are, however, obligated to make required capital contributions. The operating agreement may set forth the penalties for failing to do so.
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.
This separation provides what is called limited liability protection. As a general rule, if the LLC can't pay its debts, the LLC's creditors can go after the LLC's bank account and other assets.
Most lenders require a personal guarantee. In some cases, you may be able to avoid one with a large deposit or other collateral.
In a general partnership, general partners have equal legal and financial liability and are jointly liable for the partnership's debts. They also share profits equally, with the details outlined in a written partnership agreement.
Most states or jurisdictions have statutes of limitations between three and six years for debts, but some may be longer. This may also vary depending, for instance, on the: Type of debt. State where you live.
Bank accounts solely for government benefits
Federal law ensures that creditors cannot touch certain federal benefits, such as Social Security funds and veterans' benefits. If you're receiving these benefits, they would be exempt from garnishment.
When your business needs to take out a loan, you, as the owner, may be asked to provide a personal guaranty (aka guarantee). This guaranty makes you, as the guarantor, personally responsible for the business debt if it goes into default.
What happens if an LLC defaults on a loan? If an LLC defaults on a loan, a lender will typically try to work with you, setting up a plan to pay off the loan. If this doesn't work, you'll go into default. If you signed a personal guarantee or provide collateral, your lender has the right to seize assets.
A major disadvantage of an LLC is that owners may pay more taxes. When setting up as a pass-through to owners, they are subject to self-employment tax.
You are personally liable for business debts if you structure as a sole proprietorship, general partnership, or limited partnership. If your business falls under the sole proprietorship structure, you and your business are legally the same.
A debt is closely related to your trade or business if your primary motive for incurring the debt is business related. You can deduct it on Schedule C (Form 1040), Profit or Loss From Business (Sole Proprietorship) or on your applicable business income tax return.
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.
An LLC's money or property cannot be taken by creditors of an LLC's owner to satisfy personal debts against the owner.
If the LLC pursues a liquidation bankruptcy, all its assets are sold and the money is used to pay the debts. That's most common for LLCs that have failed.
Tortious Conduct by Members:
Members can be held personally liable for their own wrongful acts, even if those acts are performed on behalf of the LLC. For example, if a member commits fraud or engages in negligent conduct that causes harm, they can be personally sued for damages.