Most people know that corporations, limited liability companies and other corporate forms offer a measure of protection from personal liability for business debts. However, creditors and potential creditors can easily circumvent these standard protections in a wide variety of circumstances. Here are four of the most common ways:
HOW LENDERS WORK AROUND LIMITED LIABILITY PROTECTIONS:
(1) A Personal Guarantee, which is a promise to be personally liable for a business debt. With a personal guarantee in place, your creditor can easily go after your personal assets if your business does not have sufficient assets to pay your obligations.
(2) A Lien Against Real Property, which is typically a matter of public record, attached to your property, that makes the property collateral for your debt. As a practical matter, you could be required to pay off the debt before you can sell your property.
(3) A Security Interest Against Personal Property, which is a legal claim on collateral that is not real property and which may give the lender power to repossess and sell the collateral to collect the debt.
(4) A Signature of Spouse on a Loan Document, which makes your spouse responsible to repay the debt out of his or her separate property and allows the creditor to proceed directly against your spouse as part of the collection efforts.
HOW TO COMBAT THESE WORKAROUNDS: As a business owner dealing with creditors or potential creditors (such as banks and suppliers), look for ways to limit your personal exposure by rejecting proposals for any of these workarounds. In some situations, this can be done by offering an alternative incentive, such as an increased late fee or a higher interest rate on overdue payments.
IF YOU ARE THE LENDER: If your company is the lending party, look for ways to get a workaround in place. These can be very effective in securing payment of outstanding debts.