By: Doug Bend & David Nied
This article first appeared on Forbes.
In general, the owner of a legal entity cannot be held personally liable for the liabilities of their business. That being said, business owners should be wary of the following seven items that they can still be held personally liable for:
1. Bank Loans
Most bank loans for new business owners require a personal guarantee. If a business owner provides that personal guarantee and the company is unable to meet the loan obligations, the bank can hold that owner personally responsible for the loan.
2. Security Filings
When raising a round of capital, it is important to make sure that any required security filings are made in each state in which there is an investor.
If the proper security filings are not made and the company does not do well, the investor can have their investment rescinded and the owner of the company can be held personally responsible for the investment amount.
3. Contracts
Business owners should make sure that they sign all contracts on behalf of their legal entity and not themselves as an individual. In the first paragraph of each contract, it should be clear that the agreement is being made on behalf of the company.
Similarly, in the signature line, the owner should sign the agreement on behalf of the company and not themselves as an individual.
4. Government Taxes
The government can sometimes come after the business owner for any unpaid taxes. In particular, when a corporation fails to withhold proper payroll taxes, the person responsible for withholding those taxes — in many cases, the owner of the business — can be held personally liable for the unpaid taxes.
5. Wages
At least in California, owners of a business can be held personally responsible for any unpaid employee wages plus late payment penalties. This includes liability for failing to pay minimum wage, failing to pay overtime, failing to provide mandatory meal and rest breaks and other wage violations.
While officers and directors may have a claim for indemnification for such personal liability, that safety net does not apply to the owner of the business.
6. Entity Maintenance
A court is more likely to pierce the corporate veil and allow an aggrieved party to go after the personal assets of an owner if the legal entity is not being properly maintained, such as having annual shareholders and board of directors meetings.
Even though courts weigh many factors to assess alter-ego liability, failing to maintain current, accurate and complete books and records that document required meetings and events is a surefire way to get a judge to look askance at your plea for limited liability.
7. Co-Mingling Funds
In addition, a court may pierce a company’s corporate veil if the business owner is co-mingling personal and business funds. Do not be tempted to use your corporate credit card for personal, non-business related expenses — it may open the door for a creditor to march into your personal bank account.
If properly maintained, a legal entity can provide a business owner with a great deal of legal liability protection. By being wary of the above pitfalls, a business owner is more likely to prevent their personal assets from being put in jeopardy by the activities of their business.
This article was co-authored by David Nied of Ad Astra Law Group, LLP and a member of Forbes Legal Council.
Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction. Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.