When Are the Owners Responsible for the Debts of a Corporation?

Among the primary benefits of a corporate structure is the protection it offers to owners, or stockholders, who are not generally liable for its debts. This holds true whether the owners are also directors and officers of the company. If, however, bankruptcy becomes a necessity or the corporation is not otherwise able to pay its debts, some circumstances can lead to personal liability.

Personal Guarantees

Shareholders may personally guarantee one or more of the corporation's debts, which generally happens with smaller companies that may not otherwise have access to credit. This is done by contract when an officer or guarantor agrees to pay if the corporation is unable to make good on a loan, line of credit, supplier agreement or credit card debt. Even if the business files for bankruptcy protection, the cosignatories remain liable.

Signed Contracts

Officers, employees and stockholders must be careful about signing any type of lease or contract solely in their corporate capacity. In the normal course of business, they may sign an agreement for products and services thinking that the purchase is automatically in the corporation's name, when, in fact, it was drawn in the individual's name. Creditors and suppliers are well aware of the "corporate wall" that protects officers and stockholders, so they may intentionally structure agreements that make them liable. The safest way to sign on behalf of the company is for business owners to put their titles and the company's name directly after their signatures.

Corporate Formalities

All company directors, officers and stockholders who enter into agreements with outside parties should keep their personal affairs and money separate from that of the corporation. This applies to both small companies, as well as huge multinationals. If the board of directors and company owners do not adhere to all state and federal laws covering required paperwork, filings, meetings, bill payments and clear separation of personal and corporate assets, then creditors have a legal avenue to pursue to enforce contractual payments from the responsible individuals.

Government Obligations

Under certain circumstances, officers may be liable for paying corporate sales and employment taxes, or for workers' compensation. For example, if the company's chief financial officer was charged with paying these obligations --- some of which were paid from employee paycheck withdrawals --- yet did not do so, that officer may be held personally liable. Company officers have a fiduciary and legal responsibility to carry out their responsibilities properly and on time.