Willcox, Buyck & Williams, PA discusses who is responsible for debts and other obligations when a business folds.

When a Business Folds, Who Is Responsible for Its Debts and Other Obligations?

There are many reasons why a business may close its doors. In some cases, a business closes even though it owes debts to several creditors. If the company is no longer in business, who pays those debts? The answer to that question usually depends on the type of business entity used to form the company. A South Carolina business law attorney can assess the matter to determine if one or more parties might be personally liable for the company debt.

Personal Liability for Business Debts Based on the Business Entity

The type of entity used to form the company has a significant impact on whether owners, members, or partners might have personal liability for business debts or obligations. 

For example, a sole proprietor is personally liable for all business debts owed by the company even when the company closes. On the other hand, shareholders in a corporation have no personal liability for company debts if the business closes. 

Owners (members) of an LLC could have some personal liability for business debts. South Carolina laws governing LLCs state that members and managers are not personally liable for company debts and obligations incurred by the company in the normal course of business. However, if the member or manager commits a wrongful act in the course of conducting the LLC business, the member or manager could be held personally liable for debts or damages.

Partners can also be personally liable for business debts in some cases. In a general partnership, all partners are equally liable for partnership debts. However, in a limited partnership, limited partners do not participate in operating the business. Like shareholders, they are not personally liable for business debts. In limited liability partnerships, all partners are protected from personal liability for business debts.

Exceptions to Rules Regarding Personal Liability for Business Debts

Except for shareholders who play no role in the operation of the business, owners who may not ordinarily be liable for business debts could be personally liable in some cases.

For instance, if an LLC member or a limited partner signs a personal guarantee for a debt, that person is liable for the debt if the company does not pay the debt for any reason. Signing a contract in your personal name also results in personal liability for business debt. All contracts for the company should be signed in the company name. Likewise, using personal loans or personal credit cards for business expenses means that you are personally liable for the debt.

In some cases, courts allow creditors to “pierce the corporate veil” to hold owners, members, or partners personally liable for business debts. These cases generally involve intentional misrepresentation, fraud, or failure to maintain the business entity through proper recordkeeping, corporate formalities, and state requirements. 

Discuss Your Concerns with a South Carolina Corporate Law Attorney

If you are concerned whether you might be personally liable for a business debt, contact a South Carolina corporate law attorney. An attorney can advise you of your legal obligations. Before beginning a business, it is wise to consult with an attorney to determine which business structure offers the benefits you desire while protecting you from personal liability for business debts. Contact Willcox, Buyck & Williams, PA for more information today.