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I've Been Sued Personally for My Small Business's Obligation - Now What Do I Do?

By Brian N. Niemczyk, Attorney at Law

In recent years, there has been a marked upswing in the number of lawsuits asserted against small business owners for recovery of the debts and other obligations owed by the business. This trend has likely been the result of the rising popularity of limited liability companies among small entrepreneurs who would have in the past run their businesses as sole proprietorships. When this entity choice is made, many small business owners believe they will be totally insulated from personal liability for any obligations the business may incur. In most cases, they are right. However, as will be discussed below, that hasn't stopped disgruntled creditors (and enterprising attorneys) from continuing to sue small business owners for business debts. This article will discuss this issue and offer some potential strategies for responding if this all-too-common problem arises in your small business.

How "Limited" is My Liability as the Owner of a Limited Liability Company?

Generally, owners, shareholders, and members of corporations, limited liability companies, and other such entities are legally insulated from personal liability for the entity's obligations; in other words, creditors can only sue and recover from the company itself, not its owners. However, owners should be aware that this shield - often called a "corporate veil" - only applies to the company's obligations.

Fundamentally, this means that you must follow all corporate or limited liability company formalities related to filing and maintenance of "active" status with the Department of Commerce. You must also make sure to respect the separation between your personal assets and bank accounts and your company's assets and bank accounts. If you treat these as interchangeable, a court may later find that you were using the entity in an improper manner, and will hold you personally liable for all its obligations under a doctrine known as "piercing the corporate veil."

With regard to contracts, you must always take care to sign in the company's name, making sure to specify under your signature that you are signing not in your personal capacity, but instead, for example, "as Chief Manager of Acme, LLC." You must also make sure not to sign a separate agreement personally guarantying the debt.

In the world of torts - such as fraud or conversion - the limited liability provided by the entity form is narrower. If you personally committed the tort in question, you can be held personally liable even if you were acting on behalf of the company at the time. Victims (or alleged victims) of torts can choose to sue you, the company, or both. However, if the tort was actually committed by an employee or equity holder of the company, the company can (generally) be held liable, but you are not personally liable.

But I Did All Those Things, and I Still Got Sued!

Even if you take all these precautions, there is still a good chance that your name will appear on a creditor lawsuit alongside your company's. How can this happen? The simple truth is that it is very easy to just throw an owner's name on a lawsuit against the business, and hope to later find facts that would support some kind of personal liability. Parties and attorneys are under an obligation to only assert claims which they believe in good faith to have factual merit, even if that belief is based only on evidence which might be discovered later in the litigation. Thus, in a veiled effort to extort a settlement, creditors can throw out charges against you personally, and only much later withdraw those charges if they are unsupported by facts. In the meantime, you have a lawsuit out there against you, perhaps giving you sleepless nights because you are worried about being personally wiped out by a judgment against your assets.

What can you do to combat this? As always, it all depends on your particular situation. If you have good evidence that you are not personally liable (and it is worth it to you from an economic standpoint to fight rather than to settle), you can have your attorney bring a quick summary judgment motion to have you dismissed personally from the case. Sometimes even the threat of such a motion, especially when accompanied by irrefutable evidence of your lack of personal liability, will result in a voluntary dismissal of the case against you by the creditor. Of course, this tactic will cost you money in attorney's fees and costs, which cannot be recovered from the creditor unless you can somehow prove they were acting in bad faith.

If this course of action either fails or is impossible under the circumstances, you will have no choice but to settle the case or face the possibility that your personal assets will be reachable by the creditors in the lawsuit. However, with planning, foresight, and a strong legal response to any lawsuit frivolously asserted against you personally, the risk of this happening to you can be minimized.