Don’t be Personally Liable for Your Company’s Debts: Practical Tips

One of the major benefits of forming any type of company or corporation is the avoidance of individual liability for the debts, obligations, or liabilities, of the company. But that protection isn’t automatic, and it can be lost if you aren’t careful.
There are some common mistakes people make that result in them getting sued individually, or owing money individually, for the errors, actions and omissions, of their company.
What Does the Contract Say?
The first mistake that is commonly made is in the language of the contract itself in the body of the contract.
Often, people will sign their name “John Doe as President (or whatever officer) of the Company,” which they believe automatically insulates them from personal liability. What they don’t realize is that the language of the contract itself does or can be read to obligate themselves individually.
For example, the beginning of a contract may identify a party as “Business 1, and its officers, agents, owners and managers,” as typical language. Even though you may have signed that contract in your official corporate capacity, that all-inclusive language now has included you, personally, as an obligated party.
The bottom line: if you are seeking to avoid personal liability or a business contract, it’s not just your signature that matters—it’s the language and text of a contract.
Fictitious Names
Fictitious names cause problems, if they aren’t owned by the company. Whoever owns a DBA is the party liable if the DBA is sued and owes money.
If a fictitious name is sued, or owes money, and a person (a corporate officer) owns it, as opposed to a business, that person would be liable for the judgment or debt owed by the fictitious name.
That means that if you are obtaining a fictitious name or “doing business as” (DBA) name, make sure the owner is your company, or some corporate entity—not you, personally. If you do own the DBA personally, don’t contract in the name of the DBA.
On that topic, make sure your contracts specifically identify parties—who is signing for and obligated under the contract? You personally, or your company, or your company’s DBA, or all of them?
Personal Wrongdoing
Remember that your personal wrongs can break or pierce the corporate veil, no matter what the contract says.
That means that if you commit fraud, or misrepresentation, or some wrong that is “extra contractual,” and which is personal to your individual actions or errors, those actions could be deemed to be outside the terms of the contract, and you, personally, can be sued, regardless of the contractual language.
After the Judgment
Be aware that even in the best of contracts, drafted and signed the right way, there are still mistakes you can make after a judgment is entered, that can land you, personally, having to pay the debts of the company. But if you draft your contract the right way from the start, you’re at least avoiding that problem as much as possible.
Call the West Palm Beach business litigation lawyers at Pike & Lustig today for help with your business agreements, or to defend yourself if you are sued under any kind of business contract.
Source:
wolterskluwer.com/en/expert-insights/how-to-avoid-piercing-the-corporate-veil#:~:text=%22Piercing%20the%20corporate%20veil%22%20is,satisfy%20business%20debts%20and%20liabilities.