Certain Business Entities are Considered Their Own Legal Entities
Corporations and Limited Liability Companies (LLCs) are their own legal entities and they are considered separate from the individuals that run them. With that being said, there are various ways an individual can be liable for the debt of a business entity.
Personal Liability for the Debt of a Business
In North Dakota, individual officers of a business entity (Corporation, Limited Liability Corporation, and Limited Liability Partnership) can be held liable under certain circumstances:
Personally Guaranteeing Business Debts or Using Personal Property as Collateral
Lenders often require business owners to put up collateral or sign personal guarantees to secure a loan. If you signed a personal guarantee for the debt of a corporation or LLC, you are personally responsible for the debt, since you voluntarily agreed that you would be personally liable if the business couldn’t repay it. If you secured a loan for a business through your own personal property, like a vehicle or a home, the lender can foreclose on your property if the debt goes unpaid.
Piercing the Corporate Veil
Piercing the corporate veil is a legal tactic that is used to impose liability on the individual officers of a business entity. Piercing the corporate veil can occur when a business fails to follow proper formalities or fraud. See our blog post dedicated to piercing the corporate veil for more information.
Fraud or Misrepresentation
If the owner of a corporation or LLC has been discovered to have committed fraud, the owner can be personally liable for the debt of the business. False representations or omissions related to the business can open owners up to personal liability. Poor business management can also lead to personal liability due to misrepresentation:
- Not filing taxes
- Messy bookkeeping
- Poor record management
- Lack of meeting minutes
- Commingling of personal assets
- Failing to follow proper business formalities
All the above-listed factors can lead to a business owner being personally liable for business debt.
If you need assistance with determining if you are personally liable for the debt of your business, or if you want to make sure your business is set up for personal liability protection, contact our business law team at SW&L by calling 701-297-2890 or via the contact form below.
The information contained in this article and on this website is for informational purposes only and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem.