Question

In: Accounting

How can a buiness owner end up getting personally sued even if the business is incorporated?

How can a buiness owner end up getting personally sued even if the business is incorporated?

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Expert Solution

Solution:-

If a business is organized as a limited liability company or corporation then you and your business will be viewed as separate entities for legal purposes. Since the business is treated as a separate entity, you cannot be held personally liable for the debts of your corporation. This means that even if your business is unable to pay all of its debts, debt collectors cannot come after you personally to satisfy the debt. They cannot take your personal property or real property to liquidate to pay for the debt of your business. That being said, there are ways that you could be held personally liable for the debts of the business. Usually when someone sets up a limited liability company or corporation, they will use their home or some other real estate that is personally owned in order to secure the business loan. If your business is secured with a loan attached to your property, then you would be held personally liable for the debt of the business. If your business defaults on any loans, then the banks will attempt to collect the debt from you personally. If your house is attached as collateral to the loan and you do not pay the debt of the corporation, the bank can attempt to foreclose on your home. The bank would then use the proceeds from the sale of the house to pay for the business debt. You can also be held liable if you signed service agreements or contracts that list you personally liable for the payment of the contract. These terms can often be found in the fine print of a contract and in essence you will have waived your protection from personal liability.


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