Given this separate legal existence, one of the primary benefits of doing business through a corporate entity is the general rule that individual shareholders and officers are usually not personally liable for the debts and liabilities of the corporation.
Courts can, in some cases, hold individual owners, members, or shareholders personally liable for business debts and obligations. This is where piercing the corporate veil comes in. Piercing is possible if the owners fail to maintain a separate legal existence between their personal affairs and the company.
Generally, shareholders are not personally liable for the debts of the corporation. Creditors can only collect their debts by going after corporate assets. Shareholders will usually be on the hook if they cosigned or personally guaranteed the corporation's debts.
If the corporation or LLC cannot pay its debts, creditors can normally only go after the assets owned by the company and not the personal assets of the owners. However, the business owner can also be held responsible for corporate or LLC debts in certain situations.
LLCs and S corps have much in common: Limited liability protection. The owners of LLCs and S corporations are not personally responsible for business debts and liabilities. Instead, the LLC or the S corp, as the owner of the business, is responsible for its debts and liabilities.
Like most states, California doesn't permit personal creditors of an LLC member to have a court order that the LLC be dissolved and its assets sold to pay off the creditor. So, fortunately for you and your fellow LLC owners, you don't need to worry about your company involuntarily closing due to your personal debt.
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.
A corporation, sometimes called a C corp, is a legal entity that's separate from its owners. Corporations can make a profit, be taxed, and can be held legally liable. Corporations offer the strongest protection to its owners from personal liability, but the cost to form a corporation is higher than other structures.
Commercial liabilities include (1) loans, mortgages, and other debt of the business; (2) income tax and other payable taxes; (3) employee wages and salaries, and (4) personal injuries that occur on the business property. To an extent, corporations can also shield their owners from tort liability.
Courts in Georgia and California, have held officers and directors "personally liable" for wrongful acts or active conduct as well as omissions or passive conduct giving rise to personal injury or property damage, including construction defects.
Depending on the structure of a business, the business owner(s) can have limited or unlimited liability. This means that they may have either partial or full responsibility for the company's losses and debts.
Piercing the corporate veil refers to the legal doctrine that holds owners, members or shareholders of a corporation or LLC personally liable for the business's debts and obligations when they fail to maintain the company's separate legal existence from their personal affairs.
The owner is personally liable for any and all debts, liabilities, or losses incurred by the business. This means that when a sole proprietorship fails or needs to liquidate for any reason such as a major lawsuit, the owner's assets are fair game when it must meet as many obligations as possible.
Investors will likely lose their money if the business fails. In rare cases, they will have a chance to get some of their money back only if the company sells assets, but it is highly unlikely that they would recover all of their investment.
According to the Small Business Administration, only 20 percent of small businesses fail in the first year. However, after that, the numbers take a dramatic turn for the worse. Only about half of small businesses stay alive for five years. Approximately 33 percent make it ten years.
Remember, losing your job doesn't automatically mean losing your home. But you should immediately take action to address the situation and explore all possible mortgage relief options that might help you while you're unemployed.
S Corporations and Limited Liability Companies (“LLC”) both protect owners from personal liability for business debts and other liabilities, as long as all corporate formalities are followed.
As noted above, the owners of a company are generally not personally liable for either the commercial liabilities or tort liabilities of the company, and their personal assets may not be seized to satisfy those liabilities. However, there are a number of exceptions to this rule: Personal guaranties.
So, if a corporation fails to pay a debt, the corporation itself is liable, and not its individual owners or operators.
A California corporation can protect (shield) the owners personal assets from the corporate debts, liabilities and obligations. Shielding personal assets from corporate liabilities (Asset Protection) is generally one of the primary purposes of incorporation.
Asset protection
One major advantage of an S corporation is that it provides owners limited liability protection, regardless of its tax status. Limited liability protection means that the owners' personal assets are shielded from the claims of business creditors—whether the claims arise from contracts or litigation.
You may be liable for the business debt if you provide a personal guarantee. An,d it's a risk that comes with most business loans, including term loans, business lines of credit, and business credit cards. Even unsecured business loans may require a personal guarantee.