Can an LLC owner be held accountable for business debt?

Can an LLC owner be held accountable for business debt?

On Behalf of | Jun 13, 2024 | Collections

The risks of starting a business can deter some people from pursuing self-employment. Entrepreneurs who start their own companies typically try to maintain a degree of separation between themselves and the organizations that they start.

Even when only one person operates or works at a company, they can minimize personal responsibility by structuring their company a certain way. Those starting new businesses often choose to form limited liability companies (LLCs) as a means of mitigating personal risk. That way, if the company fails or faces litigation, their personal assets will generally remain protected from the risk of seizure.

Creditors may find such practices frustrating, especially if a business defaults on its debts. Is it possible to hold the owner of an LLC accountable for outstanding business debts?

Creditors can ask the courts for help

In many cases, the creation of an LLC serves to shield an entrepreneur from most legal and financial risks related to the business. They don’t have to worry about creditors suing them or facing personal responsibility for business debts.

However, sometimes creditors and plaintiffs filing lawsuits can eliminate the protection provided by an LLC. Provided that there is some evidence of financial misconduct, plaintiffs can ask the courts to pierce the corporate veil. This is a term that references holding owners or members of an LLC directly accountable for the legal and financial obligations of the business.

The courts can determine that misconduct, such as commingling financial resources, might make a business owner partially, or wholly, accountable for business debts. If the courts agree to pierce the corporate veil, creditors can initiate collection activity against the owner of an LLC if the business no longer has the necessary resources to pay its debts.

Piercing the corporate veil is one of multiple collection strategies that can work for those owed money by a business. Creditors may need to look into a variety of different options for commercial collection efforts. Consulting with someone familiar with California state statutes can help businesses determine the most effective debt collection strategy for a particular situation.