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Question
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Ken,
How can we hold the owner of a business responsible for the balance remaining on an agreement if the business is closed? Do you have a contract with a personal guarantee clause?
Tom Taylor
Alarm Center Security, Baton Rouge, LA
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Answer
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The question assumes that the business is owned by an entity other than a natural person. If someone decides to do business under their own or an assumed name then they are personally liable for the business debts. [that's one reason I counsel not to do business that way and to incorporate]. If the business is owned by a corporate entity [or limited liability company] then, generally, no personal liability flows to the owners of the entity [stockholders of a corporation or members of the LLC]. A partnership is different, by the way. All partners are liable for the debts of a partnership, so that's not a very attractive way to conduct business either.
The individuals owning the corporate entity can be liable for debts in several ways.
First, there may be statutes that impose liability. For example, withholding and sales taxes; employee wages.
Second, individuals may not be personally liable for the contractual debts of the corporation, but they remain responsible and therefore liable for their own negligence and wrongdoing.
Third, corporate owners can find themselves responsible for corporate debts if they have conducted their business ignoring the formality of the corporate entity. For example, not displaying the corporate name, not signing off in a representative capacity [as president or VP or some other officer or person authorized to represent the corporate entity], or continuing the business after permitting the corporate entity to be dissolved or other reasons.
Fourth, an individual can agree to be responsible and thus liable for the corporation's debts. This is accomplished by a "personal guarantee". In law school we learned that another way to describe a person who signs a personal guarantee is "an idiot with a fountain pen". You may find that getting your subscribers to sign a personal guarantee is not always easy or possible. But one thing is for sure, they won't volunteer to sign [and if they do it won't be worth the paper it’s written on]. So you need to ask for the personal guarantee. It should be a natural process, part of the contract execution process. For that, you need to have a personal guarantee provision in the contract. All of the Standard Form Contracts for commercial use have the personal guarantee provision. By the way, when calling for a personal guarantee you must get two signatures on the contract. The person signing has to sign in his representative capacity and again in his individual capacity. Putting in a provision that the person signing is personally liable, and then calling for one signature, most likely is not going to get you personal liability.
There is another way to hold owners of entities and others personally liable. When your subscriber goes out of business you can investigate how that was accomplished. If assets are fraudulently transferred to the owners or another entity you may be able to hold the transferees liable. A fraudulent transfer is one for less than fair or no consideration. If your subscriber has one name one day, another name the next, and no legitimate buyer who is a good faith purchaser, then go after the new entity. This is best left for professionals, attorneys who practice in the collection and bankruptcy area [like me].