AM I PERSONALLY LIABLE FOR THE DEBTS OF MY LLC, PARTNERSHIP, CORPORATION OR OTHER BUSINESS?

The answer to this depends on the factors discussed below. For today’s business owners, entrepreneurs and investors, personal guarantees requiring them to put their entire personal wealth at risk are an unpleasant fact of business life. This article provides some guidance on how to navigate this issue with the help of an example. In short, it depends on whether you undertook personal liability for the debts of the business.

Sample Personal Liability Clause in Commercial Contracts.

Let’s take the following example: Little Tran wants to open a restaurant in Fairfax Virginia. He opens a corporation, Little Tran Restaurant LLC, and signs a lease for his new business. At no point before signing on the dotted line did Little Tran think that he was incurring personal liability for the corporation’s debt in the event that the company failed to pay the hefty monthly rent. The key terms of the contract are as follows:

Signature Block:

This is an lease between Predatory Landlord Inc., and       

                        Little Tran Management LLC _____________________________, and

Print Customer Name

X__          Little Tran________________________________ ____PRESIDENT_

Authorized Signature Individually and Title for the Customer (Read paragraph 15 on the reverse hereof)         

Authority; Persons Obligated; Signer Obligated. The signer agrees that he/she has the authority and is signing this agreement (1) in his/her individual capacity, (2) as a representative of the Customer, and (3) as a representative of the entity identified in the advertisement or for whose benefit the advertisement is being purchased (if the entity identified in the advertisement is not the same as Customer or the signer). By his/her execution of the agreement, the signer personally and individually undertakes and assumes, jointly and severally with the Customer, the full performance of this agreement, including payment of amounts due hereunder (emphasis added).

Soon after signing the contract, Little Tran’s business turns out to be a miserable failure. With accumulating advertising costs and no business income to defray those expenses, he decides to shut down Little Tran Management Inc. Of course, all those unpaid advertising bills continued gathering interest, and Predatory Corp would soon forward the case to an overzealous collection’s attorney. 

Corporate Personhood. Before delving into a deeper analysis of this issue, it must be kept in mind that the corporations separate legal existence is a fundamental aspect of corporate law. “Basic to the theory of corporation law is the concept that a corporation is a separate entity, a legal being having an existence separate and distinct from that of its owners. This attribute of the separate corporate personality enables the corporation’s stockholders to limit their personal liability to the extent of their investment.” Krivo Industrial Sup. Co. v. National Distill. & Chem. Corp., 483 F. 2d 1098, 1102 (5^th Cir. 1973); see also Cheatle v. Rudd’s Swimming Pool Supply Co. 234 Va. 207, 360 S.E.2d 828 (1987).Therefore, corporate directors, officers and shareholders are generally not liable for the debts of the corporation unless they expressly consent to be bound or a court pierces the corporate veil to hold them liable under certain circumstances.     Note, however, that “But the corporate device cannot in all cases insulate the owners from personal liability. Hence, courts do not hesitate to ignore the corporate form in those cases where the corporate device has been misused by its owners.” Krivo Industrial Sup. Co. v. National Distill. & Chem. Corp., 483 F. 2d 1098, 1102 (5^th Cir. 1973); see also Cheatle at 212, 360 S.E.2d at 831 (“Imposing personal liability on shareholders for debts of the corporation is an extraordinary act to be taken “‘only when necessary to promote justice.’”)

Personal versus Representative Capacity. Furthermore, in accordance with well-settled principles of agency law, an agent contracting on behalf of a fully-disclosed corporate principal – Little Tran Management Inc. – binds only the principal and does not incur any personal liability for the obligations of the principal absent any express consent to the contrary. As the Virginia Supreme Court has observed:

Every contract made with an agent in relation to the business of the agency is a contract with the principal, entered into through the instrumentality of the agent, provided the agent acts in the name of the principal. If an agent makes full disclosure of his principal to the one with whom he is dealing, the legal presumption is that credit is given to the principal and not the agent, unless it further appears that credit was expressly and exclusively given to the agent, and it was clearly his intention to assume personal liability” (emphasis added). Warren-Connolly Co. v. Saphin, 283 AD 391, 393 (App. Div. 1954).

Stated another way, “When an agency is disclosed, and the contract relates to the matter of the agency, and is within the authority conferred, the agent will not be personally bound, unless upon clear and explicit evidence, of an intention to substitute, or to superadd his personal liability for, or to, that of the principal.”

Little Tran’s case is similar to Salzman Sign Co. v. Beck, 10 N.Y.2d 63 (N.Y. 1961) in which the plaintiff contracted with a corporation for the sale of an advertising sign, and when the corporation defaulted, the plaintiff sued its president on the theory that although he signed on behalf of the corporation, he individually guaranteed the payment. Notably, the defendant signed the contract in his corporate capacity as an agent: “Leslie 575 Corp. L.S.C.> Irving Beck pres L.S.” Furthermore, the key clause in the contract stated: “Where the Purchaser is a corporation, in consideration of extending credit to it, the officer or officers signing on behalf of such corporation, hereby personally guarantee the payments hereinabove provided for.” The New York Municipal Court ruled that there was insufficient evidence to rule that the corporate president had intended to bind himself personally.

Thus, if the agent did not undertake personal liability for the debts of the corporation, then there is no basis for you being liable for the debts of your business. We at Fox & Moghul regularly assist all types of business owners with matters related to personal guarantees. Please call our firm to schedule a consult. Your Virginia Business Lawyers are here to help.

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