Protecting Business Owners’ Personal Assets from Business Debt
Once a business owner or group of owners properly create a legal entity in order to do business, how can they protect their personal assets from liability for the debts, breaches of contract, and torts of the business entity? Business formalities must be observed, and the business and affairs of each owner, agent, and business entity must be kept separate.
Most importantly, each contract should be in writing, should clearly identify the parties to the contract, and should be signed in the name of the business entity. The full and correct legal name of the entity should be used in the contract and in communications related to that contract. It should be clear in the signature line of the contract that the person signing is doing so on behalf of the entity, and the person’s company title should be identified.
If trade names are used, do so with great care. In Georgia, trade names should be properly registered with the Clerk of the Superior Court of the county in which the business is principally located. Contracts and written communications, such as letters, emails, and invoices, should identify the full and correct legal name of the entity followed by d/b/a (doing business as) and the trade name.
The annual registration of the business entity should be properly maintained with the Georgia Secretary of State and all fees should be paid on time so that the entity is not administratively dissolved by the Secretary of State. In Georgia, one who acts as an agent of a non-existent entity may be held personally liable for his actions on behalf of the non-existent entity.
The business entity should have its own bank account(s). Personal money and other personal assets should not be commingled with business assets. Personal debts should not be paid from business accounts, and business debts should not be paid from personal accounts. Funds paid to the business should be deposited into the business accounts.
Regardless of the steps taken to protect personal assets from business debts, be aware that agents of a business may be held liable for their own negligence and wrongful acts on behalf of the business.
Although the foregoing tips help protect a business owner’s personal assets from business debts, Georgia courts assess a variety of specific facts in each case to determine whether to “pierce the corporate veil” (i.e., disregard the corporate entity) and subject the owner or agent to personal liability for the debts, breaches of contract, and torts of the business entity.
If you are a business owner who is concerned about being subject to personally liability for business debts, contact the business litigation attorneys of Schklar & Heim, LLC at (404) 888-0100. We have decades of experience handling complex business disputes in Georgia and across the United States.