There is a belief that once a business is incorporated that the owners are shielded from all liability from any source as it relates to their business.
This just isn’t true.
Individual business owners come into my office at Steidl and Steinberg all the time screaming about how a bank is coming after them for a debt of their incorporated business. Can the banks do this? Most of the time, yes. Here is an example as to how and why.
Business owner, John Jones, goes to Bank ABC and applies for a loan on behalf of his business, Widgets and More, Inc. The business was started as a corporation six months before. Things have been going well, but Mr. Jones could use some additional money to really get things moving and get the cash rolling in. So, Widgets and More, Inc. files an application to obtain a $50,000 loan from the Bank. The bank approves it and the business uses it to buy additional product.
For a variety of reasons, things did not turn out as planned and business slowed way down. Widgets and More, Inc. became unable to make the payments to the bank and the bank calls the loan. Mr. Jones decides to shut down the business and figures that he is totally safe from the bank because his business incorporated. Why then is the bank all of a sudden suing him individually for the outstanding loan? They can’t do that! Can they?
The answer is almost always yes. What the Bank neglected to tell Mr. Jones and what he failed to realize when he got the loan is that he signed a “personal guarantee”. The personal guarantee obligates Mr. Jones to that $50,000 loan if the business is unable to pay. In a small business scenario, this is almost always the case. The Bank wouldn’t lend the money otherwise. The problem is that the Bank doesn’t always explain this when the loan is taken out. It is extremely rare that a small business owner of an incorporated business isn’t on the hook for all money owed to banks for loans and credit cards. So, incorporating, in this sense, did absolutely nothing.
So, what can Mr. Jones do now? One of the options he may have is to file a personal bankruptcy. Often times, a business closure is followed by the owners of that business filing a bankruptcy to eliminate their personal obligations on the business debt.
If this sounds like you, feel free to give me a call at Steidl and Steinberg to see what options you have.