Generally, a business owner cannot be held personally liable for the liabilities of his or her business if the business is a corporation or limited liability company. However, there are situations in which courts will hold an owner personally liable. The below list, while not complete, highlights the seven most common causes of personal liability.
New business owners are typically required to provide to personal guarantee for bank loans. To the extent the new business owner provides a personal guarantee, and the company is unable to meet the loan obligations, the bank has the ability to hold that owner personally responsible for the loan.
There are situations which allow for the government to come after a business owner for unpaid taxes. One such situation is when a corporation fails to withhold the necessary payroll taxes. If such happens, the individual responsible for withholding those taxes, i.e., the owner, can be held personally liable.
In California specifically, business owners can be held personally liable for any unpaid employee wage, as well as late payment penalties. This includes liability for failing to pay minimum wage, overtime, and mandatory meal and rest breaks.
It is important that business owners sign all contracts on behalf of their entity and not on behalf of themselves as an individual. It is also important that the contract makes it clear that the agreement is being made on behalf of the company.
Failure to Separate Business and Personal Funding
If courts discover that a business owner is co-mingling personal and business funds, they will be more likely to pierce the corporate veil and hold that owner personally liable. As tempting as it might be, business owners should never use a corporate credit card or bank account for personal expenses.
Failure to Properly Maintain Corporate Formalities and Adequate Capitalization
Although courts do not pierce the corporate veil often, they are more likely to do so and allow an aggrieved party to go after personal assets of the owner if the entity has not been adequately capitalized andis not being properly maintained, such as failing to hold annual shareholder meetings, maintaining up-to-date and accurate books and records,and as well as obtaining board and shareholder consents for certain corporate actions.
If you are considering the formation of your own company, it is in your best interest to contact an experienced start-up lawyer in Los Angeles such as Afshin Hakim of Hakim Law Group to assist you in the prevention of the above-listed risks. Or, if you are a current business owner and are concerned that you are at risk for personal liability, please contact HLG today at (424) 299-8913 or visit www.HakimLawGroup.com for further information.