YOU MAY BE PERSONALLY LIABLE FOR THE DEBTS OF YOUR CORPORATE ENTITY

Posted by Vokshori Law Group on October 4, 2010 · 3 Comments 

Many individuals believe the corporation protects them from liability and from the creditors of the business. This is often a mistake. Corporate owners, officers, and stockholders of a closely held corporation often have to either sign as a guarantor for the loan, the lease, or the accounts payable for the corporation. This results in personal liability for the business debt. By signing the guarantee or by signing the loan documents, they make themselves personally liable.

As an example, the president of IBM does not sign a guarantee on IBM’s debts. IBM has its own ability to borrow money. I am an IBM stockholder. I am not liable for IBM’s debt. If IBM goes out of business I can only lose the money I have invested in IBM’s stock. In the alternative, with closely held corporations, the stockholders, the corporate officers, the members or the owners are usually all required to sign various guarantees. The newly formed corporation has no credit history. It has limited collateral. There is a limited business history for the banks to base their credit decisions on. This often holds true even if the small corporation has been around for a while. The lenders are in the driver’s seat and can demand personal guarantees. The parties to the corporation often take out business credit cards in their own name rather than the corporate name. Often times the lenders will even take mortgages on the stockholder’s or members’ homes. This protects the lenders because they have another party to collect from should the business not be able to pay the debt.

(This article is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer. If you have any questions about this Article, please call or e-mail Stephen Vokshori, Esq. (213.785.5366 / stephen@voklaw.com) or any other member of Vokshori Law Group.)

Filed under Corporate Entity, Debt, Liability · Tagged with Corporate Liability, debt, IBM