COLLECTING FROM BUSINESS ENTITIES: When is the owner personally liable for the debt?

Collection of commercial account can be tricky from the standpoint of WHO you can actually demand the money FROM…in other words, when is there PERSONAL LIABILITY FOR THE ACCOUNT.



A proprietorship is a simple form of business involving a single owner who has the business in his own name. An example is John Jones dba Jones Bike Shop. This form of business may not even be registered. Occasionally, you find the business is registered under the assumed name or fictitious name county filings in the county where the business is operated.


A partnership is a little bit more complicated but similar to a proprietorship with more people. The general partners are the owners, and, like a proprietorship, they are personally responsible for all debts incurred by the business. An example would be John Smith and Mary Smith dba Smith’s Bike Shop. A fictitious or assumed name certificate may be filed in the county. A certificate of a partnership may be filed in the county or even with the state in some states. Some states have lookup documents where you can lookup to see if a business is registered as a partnership.


A partnership can get a little bit more technical if you get into the concept of limited partnership. In this instance, there are two different kinds of partners: a general partner and a limited partner. The general partner is personally responsible for all debts and the limited partner is like a shareholder of a corporation; that person has invested money and is only liable to creditors for the amount of his investment. For example, if the limited partner invests $10,000.00 and that $10,000.00 is fully paid in, then the limited partner is not exposed for any other liability. Limited partners generally are not active in the business and are really prevented from being active in the business. The general partners are generally active in the business, responsible for day to day activities, and, again, are liable for contracts the business enters into. There must be at least one general partner and one limited partner. Partnerships can even consist of corporations, which form partnerships. Sometimes these are also formed as joint ventures. A joint venture is different because it is formed for just one limited purpose such as to run an event for a weekend or something like that.


Corporations of course are very familiar to all of us. There are formalities. They must be filed and they must be maintained. If they are not maintained, corporations are dissolved automatically by the state they are in generally after three years.


The whole point of a corporation is that there is no personal liability for their owners. However, there can be personal liability if they sign personal guarantees or if there is a theory for piercing the corporate veil.


Corporations are on file with the state. They can generally be confirmed through a telephone number or on line access.


Each state has its own corporation law, partnership law but most states have adopted the Uniform Partnership Act so partnership enforcement is consistent and also most states, or at least 75% of the states, have adopted the Model Business Corporation Law which is also uniform.


Like the Uniform Commercial Code, these are all laws adopted in individual states. None of these are federal laws. However, there is remarkable uniformity throughout the country.


Question: Who is liable with regard to these legal entities and who can we cask to pay us when we make our demand?


Answer: This is a very good question and probably should be broken down as follows: those legal entities which we call and can remind the owners that they are personally obligated and those business debtors we call knowing that there is only business liability.


First, the entities with personal liability:


1. Proprietorship. If the business is John Jones dba Jones Bike Shop or anything similar, John Jones is personally liable. The bike shop could have folded but Jones’ personal assets are still exposed to you, the creditor. You can threaten to sue him personally. You can threaten to sue him and take his personal assets as part of that process (this should all be done professionally as you know). There is full personal liability and a sole proprietor cannot escape that.


2. General Partners of a Partnership are personally liable the same way sold proprietors are. You can remind them when you make your collection calls that they will be held personally liable for contracts and that their personal assets are “on he line”. Of course, this is not true with regard to limited partners.


3. Corporations involved no personal liability with a few exceptions: check your client’s documents carefully to see if there are any personal guarantees which would make those individuals (generally top officers) personally liable for business debts. The guarantees may even contain some restrictive provisions such as a limitation in dollar amount or a limitation of time.


There are a few other ways that corporate officers or directors could be personally liable for debts but when making demand over the phone, I would not go into it. In other words, you may be considering a theory of piercing the corporation veil because there was some fraud or concealment or whatever. After checking with an attorney experienced in that area, you could probably make such a demand but otherwise, I would stay away from it.


A corporation, which has expired, and the debt was incurred after the expiration date is a potential basis for personal liability. I use the word “potential” because the corporation can re-file itself and erase the personal liability. That can happen any time up until the entry of judgment in most states. Let'’ take an example so that this concept is clear; Fred Jones owns Jones Corporation. He files the corporation but fails to file annual reports. After three years, Jones Corporation is dissolved. The disillusion (that is what it is called) occurs for purposes of this example on August 1, 2001. On September 1, 2001, he buys $10,000.00 worth of product from your client. At the time the produce is purchased, the corporation is technically defunct, dissolved, does not exist legally. He can use some theory such as “de facto” or “de jure” if he knows the lingo but you can also remind him that your client is prepared to litigate on the basis of personal liability since the corporation was dissolved at the time the purchases were made. There was no corporate entity at that time.


Likewise, some debt can be incurred prior to the corporation being formed. This is called “promoter liability”. If for example, John Jones owned a Jones Corporation but he incurred some debt from your client prior to the corporation actually being formed with the state (it is very easy to determine the incorporation date by calling the state) then he is personally liable to you as a promoter of the corporation.

Collection Scam Artists...they're even contacting consumers on fake debts!

The Federal Trade Commission governs much of our industry, and handles numerous complaints from consumers on such matters as Fair Debt Collection Practices Act violations. The newest scam appears to be the hiring or creation of call centers made up of fake debt collectors to make strong-arm collection calls on fake debts!

Yes, scam artists have figured out that if you harass someone enough, they might just pay a debt that doesn't even exist...just to get the "debt collector" off their back!  The FTC offices are referring to this scam as phantom debt. 

A number of consumers have already admitted to paying hundreds of dollars by check and even credit cards, to get rid of "collectors." These consumers paid these fake debts as they were worried the fake collectors really would follow up with threats to have them  fired, garnished, arrested at work, or, they thought they may really owe the money from some pay check advance or similar situation they simply forgot about.

For those of us who are involved in legitimate collections, knowing that intentional violators of the FDCPA exist is bad enough. Now we find that scam artists have invaded our industry and are making collection demands on debts that don't exist to get money from innocent people.

According to a recent article in the Detroit Free Press (freepress.com), some callers are demanding as much as $2,000 from consumers, under threats of wage garnishments, having the consumer arrested at work and the like.  The scam artists seem to have quite a bit of information on the people they are calling. Since one crooked debt collection firm took in $5 million, the scam obviously works.

I firmly believe anyone reading this blog is an honest debt collector just trying to collect on legit debts using legal means....however, we can't put our collective heads in the sand...we have to be aware of these illegal practices.