Topic: director liability

limited liability company

Can a Limited Liability Company’s creditors go after the owner’s personal assets?

Question asked by James “Seamus” Lusk, on Quora: If a Limited Liability Company goes bankrupt, can the company’s creditors go after the owner’s personal assets?

Answer from Victor Fong, Licensed Insolvency Trustee in Toronto, Canada

Caveat: I practice in Canada and I am not a lawyer. You should contact an attorney and discuss with her the particulars of your situation.

With that being said, as you may be aware, LLC is an acronym for Limited Liability Company. So the entire purpose of operating under an LLC is to avoid personal liability for the company’s debts. So to answer your question, the general answer would be “no”.

However, there are three major exceptions:

  • If you gave any personal guarantees for the LLC’s debts (which most banks will insist on if the business loan is large), then you are personally on the hook.
  • If your personal conduct was determined by a court of law to be especially egregious resulting in losses for your creditors, the LLC may not protect you. The legal term for this concept is called “piercing the corporate veil”.
  • In Canada, if you are a director of the corporation, you are personally liable for obligations created by statute such as unremitted payroll deductions for income tax and government pension contributions, unpaid employee wages, and unremitted sales taxes. I’m assuming that there would be similar laws in the United States (which is where I assume you are located).

You also have to consider your own personal reputation. Do you plan to start a new company in the same industry? Because even if your corporation’s creditors cannot touch your personal assets, your reputation will be such that suppliers and financiers in your industry will no longer want to deal with you. You look at someone like Donald Trump who had multiple bankruptcies (through his corporations) and has accumulated a questionable reputation among lenders, tradespeople and suppliers in the real estate industry. Some food for thought.

business bankruptcy

What happens to a person whose business goes bankrupt?

Business bankruptcy question: a Quora user asks: What happens to a person whose business goes bankrupt?

Victor Fong, Licensed Insolvency Trustee in Toronto, Canada replies:

In Canada, if you are incorporated, then you are not responsible for the corporation’s debts. There are however 2 major exceptions:

1. If you are a director, you are personally responsible for unpaid wages & vacation pay, unremitted payroll taxes and unremitted sales taxes that were left unpaid from the distribution of the corporate assets (if any) by the bankruptcy trustee.

2. If you signed any personal guarantees for the corporation, you will be personally liable if these debts remain unpaid from the corporate bankruptcy proceedings.

More often than not, the business was also the owner’s sole source of income. So the business owner has most likely accumulated a lot of personal debt to finance his living expenses because he wasn’t earning enough money from the business. So in my experience, the business owner will usually file for personal bankruptcy alongside the bankruptcy of his business corporation.