Personal Liability for Business Obligations
Every business faces the risk of incurring liability. Some businesses have a higher risk than others whether in contracts or torts.
A contract is a legally enforceable agreement. When one party to that agreement doesn’t hold up its end, the other party can recover damages for the losses incurred from a material breach of that contract.
A tort happens when someone is injured from an intentional or negligent act of another. The person injured from the intentional or negligent conduct can recover damages for expenses or loss incurred from the injury.
The question you really want to know the answer to is if your personal assets are at risk. Can the party who was injured by your company’s tort or breach of contract recover damages from you as the business’s owner? Will you lose your house, your car, and your retirement savings because of something that happened with your business?
First, 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.
More importantly, the Texas Business Organizations Code (TBOC) provides complete protection to business owners when the business is established as one of a few certain types of entity.
The business entities discussed below are divided into two groups, those entities that offer full protection from personal liability and those that don’t offer any protection.
These are the default business entities that exist when you start operating a business without following the TBOC requirements for establishing a separate specific legal business entity.
You are the business, and the business is you. Property is held in your name, and contracts are signed in your name. Not even considered an entity, it is the default business formation that is created when you hang your own shingle and start doing business. It offers no protection for liability incurred by the business operations. Your personal assets are at risk for being recovered to satisfy judgments against the business.
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.
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 TBOC requirements are met for properly establishing the entity.
Limited Liability Partnership (LLP)
Like a general partnership, 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.
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.
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 Guarantee – When you start a new business and apply for a credit card or loan for that business, the bank will likely ask you to sign as a guarantor on the card or loan. The effect of this personal guarantee 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.