Business owners are not personally responsible for corporate debts

busted-piggy-bank-500x575The owner of a corporation is usually not required to pay bills, contract payments, or invoices owed by the corporation.  This means that a creditor may only demand payment of a debt from money or property held by the corporation (such as the company’s bank account, and the company’s inventory, equipment or real estate), and may not take money or property held by the owner for non-business use (such as the owner’s house, personal bank account, cars, etc).  The law reasons that the corporation is a “separate person” from all of its owners; this means that if ten owners form a corporation, the law sees eleven people, and the eleventh person (the corporation) is the only person who can legally be made to pay debts that the corporation acquires in the course of its business.  It does not matter if the corporation lacks the money to pay the debt, and usually it does not even matter if the owners personally approved or participated in the corporate action which caused the company to acquire the debt.

Of course a business owner can make a contract to be personally liable for a corporate debt, as in the case of an owner who agrees to guarantee a loan made to the corporation.  In the absence of an owner’s agreement to pay, however, a business owner is usually not responsible for a corporate debt merely because she or he is an owner.

 

There are some exceptions to this rule.   It is possible to hold a business owner personally liable for a debt of the corporation if the corporation and the owner behave in such a way that they act as if they were the same person, despite the corporate filing with the Texas Secretary of State’s office.  Endsley Electric, Inc., v. Altech, Inc., 378 S.W.3d 15, 23-24 (Tex. App. –Texarkana, 2012).  This is known as the “alter ego” theory of owner liability.  “Alter ego is shown from the total dealings of the corporation and the individual, including factors such as: (1) the payment of alleged corporate debts with personal checks or other commingling of funds; (2) representations that the individual will financially back the corporation; (3) the diversion of company profits to the individual for his or her personal use; (4) inadequate capitalization; (5) whether the corporation has *24 been used for personal purposes; and (6) other failure to keep corporate and personal assets separate.” Id.  However, in the case of money owed by a corporation under a contract, Texas law does not even allow an owner to be liable under an “alter ego” claim unless the owner used the corporation to deceive the creditor (called “perpetrating a fraud”).  Tex. Bus. Orgs. Code 21.223(a)(2) and (b); Ocram v. Bartosh, 2012 WL 4740859, at *3 (Tex. App. –Houston [1st Dist.] 2012).

There are also laws under which an individual owner or manager can be personally liable for some corporate actions in which he participates, such as overtime violations under the federal Fair Labor Standards Act (FLSA).  However, these laws typically require some personal involvement by the owner or manager in the civil violations.

So if a business owner receives a letter (or a lawsuit) from a creditor demanding that the owner pay one of the company’s debts personally, the owner should talk to a lawyer before paying the debt.  Most of the time, an owner can successfully fight attempts by creditors to make the owner pay the company’s debts from the owner’s personal money.  It helps if the business owner knows what is personal money and what is not, and keeps a clear separation between the two.

 

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