Owning your own business is a life’s dream for many people. Whether you’re a sole proprietor, part of a partnership or LLC, or a shareholder of a corporation, your goal is for the business to be successful and profitable, but that isn’t always the case. If you’re facing a situation where bills are coming due that the business can’t pay, your creditors are going to look to you – and that leaves you wondering whether you’re legally on the hook. The answer to that question is less than straightforward.

Most business owners know that sole proprietors and partnership members are always responsible for the debts that their business accrues. But if you set your business up using a structure that you hoped would shelter you from liability, you may be disappointed. That’s because the protection that an LLC or corporate structure provides is limited by individual circumstance, as well as standard business practices such as contract terms that include personal guarantees.

A personal guarantee is exactly what it sounds like. If you signed a contract that extended you credit and the agreement includes a personal guaranty, then even if your business is an LLC or a corporation, if the company fails to pay then you have agreed to step up. And before you rue the day that you signed that contract without having your attorney review it, keep in mind that most established banks and lenders are going to automatically include this language, and are unlikely to extend credit without it – especially if the company is newly established.

The other thing to keep in mind is that, even in situations where your business structure was purposely chosen to protect you from personal liability, most attorneys are able to pierce the corporate veil on behalf of their clients who are seeking payment. If you are a shareholder in an S corporation or C corporation, you will definitely be liable for debts if you cosigned or personally guaranteed them, as well as if personal and business funds were comingled. The same is true of limited liability companies.

If you are being pursued for business debts that you believe you should not be liable for, your best first step is to consult with an experienced attorney. For guidance in navigating this complex situation, contact our office today to set up an appointment.

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