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Ask a Lawyer -- Corporations
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Question: My husband and I owned a business for 8 years. In the 4th year of owning the business, we incorporated into an s-corp. We have since closed the business and are being pursued personally for outstanding business debt. Are we liable and can they attach to our personal property? Response: This question is more of a debtor-creditor issue than straight corporation law (where I have expertise). Thus, I'll only make a few comments on the issue. Generally, owners cannot be held liable for the debts of corporations. The fact that a corporation has an S versus C designation for tax purposes is of no consequences in a debtor - creditor dispute of this nature. There are various exceptions to the general rule however. One would be if you and your husband, as shareholders, guaranteed some or all of the debts of the corporation. Banks loaning to small businesses typically require the shareholders to guaranty the loan. A second situation is where the supplier / lender legitimately, in good faith, thought it was dealing with a partnership as opposed to a corporation. Your particular case is troublesome in that you may have had suppliers who dealt with your business as a partnership (for whose debts you and your husband would have been personally liable) in prior years and, after the conversion to a corporation, contracts might not have been changed nor was it otherwise formally brought to the attention of the suppliers that they were now dealing with a corporation. This could include such entities as the telephone company. An additional situation where shareholders can be held personally liable for corporate debts is a claim of alter ego (a/k/a "piercing the corporate veil"). Entire books are written on this last topic so I'll just refer you to a few articles there: Link 1 and Link 2. My suggestion is to get a local lawyer familiar with both corporate law and debtor-creditor issues. Have him or her contact the creditors, inform them that the business was incorporated, and ask what theory they are advancing in their claim against you. The burden will be on the creditors to articulate and prove their theory. Submitted: 2-21-2006; Nancy, Indiana Response: 2-21-2006; JJR Add A Comment |
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