Starting a business is a big undertaking! Many business owners choose to structure their businesses as corporations, partnerships or LLCs for the benefit of limited liability. Although this protects you from being personally liable for company debts, there are still some circumstances where directors and officers can be held personally accountable for the company’s debts. If your company is starting to struggle financially, it’s important to understand the risks associated with being held personally liable for company debt.
When might a director be held personally liable for company debts?
When a corporation cannot pay its creditors, there are potential legal consequences and personal liability for directors, officers and managers. Although this may sound intimidating, it is important to understand that, in most cases, those responsible for managing a business will not be held personally liable for corporate debts incurred by their company.
In certain cases, however, an individual may be held personally responsible for corporate debt. This can occur when a director or officer has acted negligently or fraudulently in the management of the company’s finances. In addition, under certain circumstances, a director or officer may also be held liable if they have failed to properly manage the company’s finances or have otherwise acted outside of their authority as a manager or director of the company.
As a director, it is your responsibility to ensure that you are acting in the best interest of the company, its shareholders/members and its creditors during financial difficulties. If you fail to do so and act wrongfully, you could be held personally liable for any debts the business incurs. This includes, but is not limited to:
Failing to uphold director duties.
One of the most common forms of director wrongdoing is failing to uphold their duties. As a director, you have various responsibilities, including managing finances responsibly and making sure that all legal requirements are met. Failing to meet these obligations may result in personal liability if the company becomes insolvent due to your neglect or mismanagement.
Accessing finance through fraudulent means.
Another form of director wrongdoing is attempting to access finance through fraudulent means, such as submitting false documents or providing misleading information. This type of behavior can lead to serious consequences, including criminal charges and personal liability, if a business becomes insolvent as a result of your actions. It’s important to ensure that all financial information provided is accurate and up-to-date at all times.
Misfeasance occurs when a director intentionally acts against the interests of creditors or shareholders by taking advantage of their position to benefit themselves personally. Again, this type of behavior can lead to severe repercussions for both the company and the individual involved if it results in insolvency or bankruptcy proceedings being initiated against the business.
Continuing to take payments knowing the business cannot afford it.
Another form of director wrongdoing is continuing to take payments from customers knowing full well that the business cannot afford them at this time. Doing so can put the company in further financial difficulty and may also lead to personal liability if it results in bankruptcy proceedings being initiated against the company due to its inability to repay its debts.
Selling company assets at a price lower than their market value.
Another form of misconduct comes into play when a director decides to sell off company assets at prices lower than their market value without consulting other board members or stakeholders involved with the business first. Doing so can cause financial harm not only for those who have invested money in the business but also to those who would have been able to receive more money had they been consulted first about potential buyers for these assets before the sale or if the sale would have been for fair market value.
Directors should always strive to act in accordance with their fiduciary duties towards creditors and shareholders when making decisions on behalf of their businesses. Otherwise, they risk being held personally liable for any resulting debts should things go wrong due to their misconduct or negligence.
Taking steps such as ensuring accurate financial information is provided at all times, avoiding fraudulent activity, refraining from selling off assets below market value without consulting stakeholders first, and managing finances responsibly are just some ways directors can help protect themselves from potential personal liability should their companies become insolvent due to their actions.
The Campbell Law Group P.A.’s Are Your Trusted Partners
Directors, officers, and managers of companies in Florida need to know how their personal assets may be affected if their company cannot pay its debts. The Campbell Law Group P.A. is here to provide guidance on the implications of corporate debt and personal liability for directors and officers in the state of Florida.
The Campbell Law Group P.A.’s goal is always focused on helping clients minimize potential conflicts whenever possible, but if litigation is necessary, then our team has the experience needed to effectively represent you or your business through every step involved until a fair outcome is achieved – making sure all your rights are upheld at all times throughout any proceedings.
Our commitment is unwavering when it comes to representing clients, whether it’s related to corporate matters or family law cases – so don’t hesitate to contact us today if you’re looking for experienced attorneys who will put your needs first!