Credit and Collection News : A Division of Elsos




Credit and Collection News now lets you post comments and discuss all the relevant news on our newsletter. Check out what our readers are saying about the Credit and Collection Industry.

Browse by Category:


Browse by Month

October 2020
April 2020
March 2019
December 2018
July 2018
June 2018
March 2018
July 2017
June 2017
May 2017
April 2017
March 2017
February 2017
January 2017
December 2016
November 2016
September 2016
June 2016
February 2016
January 2016
December 2015
November 2015
October 2015
September 2015
August 2015
June 2015
May 2015
April 2015
March 2015
February 2015
January 2015
December 2014
November 2014
August 2014
July 2014
June 2014
May 2014
April 2014
March 2014
February 2014
January 2014
December 2013
August 2013
December 2012
November 2012
October 2012
October 2011
September 2011
April 2011
October 2010
July 2010
March 2010
December 2009
October 2009
September 2009
July 2009
March 2009
January 2009
May 2008

Most Business Owners Are Not Personally Liable for a Company’s Debts

posted on 2013-12-30 by Dean Kaplan

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. For small businesses, the primary reason the owner took the time and expense to set up the separate legal entity was to prevent being personally liable for business debts.

Historically, when an individual started a business, such as a cobbler, blacksmith, or street vendor, the business and the person were one and the same.  These businesses are known as proprietorships, and in these cases, the owner is personally liable for all of the business's obligations.

As we all know, it takes money to start, grow and run a business.  The concept of corporations came out of the need to raise larger amounts of capital to fund larger businesses, which meant the need for multiple investors.  Since most investors were not actually involved in running the business, they wanted to limit their liability to the amount they invested.  When you buy a share of stock in Apple or IBM, the most you can lose is what you paid for the stock, regardless of how much money the corporation might owe to vendors and lenders.  The corporation is a stand-alone entity completely separate from the owners, managers, and employees, and therefore the owner is not liable for the business debt absent other circumstances. ,

There is some chance you can pierce the corporate veil to create personal liability as we explained in an earlier article.  Given that this can be an expensive and difficult process with uncertain results, it is not a great alternative in most cases.   

An individual is liable for a corporation's or LLC's debt if they provide a personal guaranty to the lender or vender.  This needs to be a written document specifically stating the individual is guaranteeing the obligation and then signed by the guarantor as an individual and not as an owner or officer of the company.  A personal guaranty can easily be included in a credit application.  An email or letter where the individual 'promises' you will get paid is not a valid personal guaranty and does not create personal liability. 

As a commercial collection agency specializing in large claims, we always prefer to have a personal guaranty.  It gives us more leverage to make our client’s invoices a higher priority regardless of the company’s financial situation.