This will be a multi-post blog entry. This eighth post discusses administrative issues that may potentially expose business owners to personal liability.
Post 8 – Administrative Issues That Might Lead to Personal Liability for Business Owners
Entrepreneurs as part of start-up Businesses often focus more on business fundamentals e.g. quality product or service delivery, customer satisfaction, marketing and business development, to ensure steady cash flows. Consequently at the initial phase, logistical and administrative issues are low on priority and sometimes even obstructive. Further, cost constraints in start-ups cause business owners to initially avoid spending on sophisticated business and legal advice early on, at times making them susceptible to adopting improper systems and procedures.
As we mentioned in an earlier blog, some business owners may end up comingling personal funds with that of the Business. This may, in a litigation context, cause the court to pierce the corporate veil to hold owners personally liable. Cash strapped entrepreneurs might even agree to provide their personal assets or properties as collateral to banks for business loans. Need for funds at the initial phase sometimes pushes business owners in a corner, causing them to even co-sign or provide a personal guarantee in order to avail of business loans or incur expenses before legally forming the business. Business owners should in such circumstances, ensure their interests are protected by a back-to-back arrangement with the Business e.g., bylaws of the entity providing owners an indemnity or a reimbursement for claims or debts incurred for the Business. This will help shield Business owners from unintended third party claims and liabilities.
About the Author
Shawn McBride – R. Shawn McBride is the Managing Member of The R. Shawn McBride Law Office, P.L.L.C. which helps clients in legal issues related to starting companies, joint ventures, raising capital from and negotiating with investors and outside General Counsel functions. Shawn can be contacted at: 407-517-0064; [email protected], or www.mcbrideattorneys.com.
Saurabh Nathany – Saurabh Nathany is a Paralegal at The R. Shawn McBride Law Office, P.L.L.C. Saurabh can be contacted at: (312) 394-9924, or [email protected].