Personal Liability for Business Obligations
Every business faces the risk of incurring liability. Some businesses have a higher risk than others. These risks include breach of contract, personal injury, and more.
Commercial leases are contracts. If a business breaches a lease, the business may be liable to pay damages to the landlord.
If a person is injured on the premises of your business, the business may be liable to pay damages to the injured person.
Other liabilities further expose businesses to additional liability.
Personal Propert
Business owners need to know that if they don’t carefully structure their business, their personal assets can be seized to satisfy the business’s liabilities.
Texas has homestead laws which offer some protection to you from being kicked out of your house to satisfy certain types of claims. The details of and exceptions to the homestead laws are important but beyond the scope of this article.
This article talks about business entities that protect business owners from having personal peropety at risk to pay for business liabilities.
Business Entities
First, there are the default business entities that exist when you start operating a business without following the requirements for setting up a legal business entity.
Sole Proprietorship
In a sole proprietorship, you are the business, and the business is you. Business property is held in your name, and business contracts are signed in your name. It offers no protection for liability incurred by the business operations. Your personal property is at risk for being taken to satisfy judgments against the business.
General Partnership
In a general partnership, you and another person, or other people, share ownership, profits, losses, management, etc. It doesn’t require any written agreement. Another default business formation, it exposes your personal assets to liability incurred not only by your actions but also by the actions of your partner.
Full Protection
These business entities shield their owners from losing their personal assets to liability incurred by the business. Such protection is only available if all the legal requirements are met for properly establishing the entity.
Limited Liability Partnership (LLP)
In an LLP, you share ownership, profits, losses, management, etc with the other partners. Unlike a general partnership, if a court awards damages against the LLP, as a partner, your personal assets are not in danger of being taken to satisfy that award. An LLP can’t be formed by only one owner. There must be at least 2 partners to establish an LLP.
Limited Liability Company (LLC)
The limited liability company, or LLC, is a relatively new type of business entity. An LLC can be formed by only one owner, unlike the LLP that requires more than one owner. Owners of an LLC are called members. The members of an LLC are protected from the liability incurred by the LLC. An LLC can be managed by the members or by a separate group of managers.
Corporation
Owners of a corporation are called shareholders or stockholders. The corporation is managed by a board of directors who are elected by the shareholders. While neither shareholders nor directors may be held personally liable for damages awarded against a corporation, there are rules that govern the conduct of both shareholders and directors in their capacities as owners and managers of the company.
Special Notes
1. Personal Torts– A person is always accountable for the torts he or she commits. So, if you intentionally or negligently injure someone while working for your business, having a corporation, LLC, or LLP won’t protect you from the liability you’ll incur from your own negligent or intentional conduct.
2. Personal Guaranty – When you start a new business and apply for a commercial lease as a corporation, LLC, or LLP, the landlord will likely require a personal guaranty. The effect of this personal guaranty is that if your business is unable to pay back the debt, you will be personally liable to pay it back. Having a corporation, LLC, or LLP won’t protect you from the obligations you have as a guarantor.