Corporations And Personal Liability — When You Can Sue The Customer’s Owner

People often assume in collections that if your customer is incorporated, you can’t sue the owner.  In fact, that’s not always true.  This article will discuss several situations that support personal liability, and how a claim against the owner can help you get paid.

Grounds For Personal Liability When Collecting Receivables

Corporations and limited liability companies are business structures that shield their owners from personal liability. Because the entity is considered its own person, the owner usually isn’t responsible for its debts, which can make collecting receivables harder.  

However, these situations support personal liability when collecting receivables:

1. 1. Personal Guarantee: where as a condition of extending credit, you require the owner to sign a personal guarantee. Typically, this would appear in your credit application.
   2. Corporate Status: where public records reveal the customer was never really incorporated, or that its corporate status lapsed at the time of the sale.
   3. Fraud: where the owner lied to induce you into a contract he never intended to honor. The issue isn’t whether he breached the contract later, but whether he intended to pay in the first place.  Fraud can be hard to prove, but it pierces the corporate veil and supports personal liability.
   4. Fraudulent transfers: where the owner transfers corporate assets with actual intent to avoid his creditors (“actual fraud”), or where he can’t pay them after transferring the assets for little or no consideration (“constructive fraud”).
   5. Distributions: where the customer goes out of business and the owner pays himself before the creditors. If your customer has closed down, you’ll want to know where the money went.

Benefits Of Personal Liability When Collecting Receivables

There are 2 immediate benefits to suing the owner personally:

First, it gives you more assets to pursue.  If the customer goes out of business or otherwise can’t pay you, the owner may have resources. 

And second, it motivates the customer to pay.  Forced to choose, most owners would rather have the company pay you than pay you themselves.  And if they have other creditors, they’re more likely to make you a priority.

While corporations and LLC’s normally shield their owners from collections, that’s not always the case.  In appropriate circumstances, you can name the owners personally, which can make a big difference in whether you get paid.

For more information on B2B collections, or if you’d like to discuss a specific collection issue, call me at 856-667-1669 or contact me here.

This material is for informational purposes only and should not be construed as legal advice.  No person should rely on this information without seeking the advice of an attorney.