Business Collection Attorney: 6 Questions About Fees, Timing, and Who Can Be Sued

A lawsuit from a creditor’s attorney won’t usually put you in court personally. It’s usually against the LLC or corporation. If the lawsuit is personal, a few likely causes are a personal guarantee on the debt, something you did wrong yourself, a veil piercing, moving assets, or a statute. The lawyer will probably work on contingency around a third, and the creditor fronts court costs. Deadlines to answer are short.

One common misunderstanding is about who can be sued on the company’s debts. For most debts, it’s only the company itself. Being a member or manager of the company does not make you liable, even in a single-member LLC. If the LLC has no money, it doesn’t automatically make the owner liable either.

Hold You Liable for the LLC’s Debt

Most often you get sued because you personally guaranteed a debt. Many creditors of small businesses want an owner’s personal guarantee, including banks, landlords, equipment lessors, and suppliers. The SBA requires them for every 20%+ owner on a 7(a) loan. If you signed one, it means they can sue you, not just the business, when there’s a default. The creditor can sue the LLC and you in the same case.

There are a few other ways. You might have done something wrong yourself, if you got sued for fraud or negligence or something like that. The LLC doesn’t shield you from liability for your own wrongdoing. If you lied or took someone else’s property, it won’t protect you. An unpaid invoice or failed job isn’t automatically fraud. There’s veil piercing, but you won’t see it too often. Courts can decide to hold you liable for the LLC’s debt if you or the company did things wrong in a bad way, usually by mixing up company and personal money or starting with way too little capital.

Veil piercing decisions are case-by-case. No single fact decides them. The judge will look at the whole relationship of the company and owner and what they did to see if they acted as a single person. Skipping formalities like signing meeting minutes is not enough by itself. Mixing personal and company money, or using the company to cheat creditors or defraud other people, matters more.

Then there’s moving assets. If you move assets around to keep from getting sued, you might end up deeper in trouble. Transfers to hinder or defraud a creditor can be challenged. Moving equipment into a new company doesn’t necessarily protect it. Red flags for an improper transfer include: keeping them hidden, giving assets to an insider or relative, making the transfer after a lawsuit is threatened, and getting too little in return. The creditor can still sue to get the assets back, or even hold the transferee liable.

Other laws can reach you directly. If you withhold payroll taxes from employees and don’t pay them to the IRS, you may be personally liable for the Trust Fund Recovery Penalty. It can equal the unpaid tax.

All these possibilities mean the creditor’s lawyer will probably dig. Did you sign a guarantee? Did the LLC move assets after the dispute? Is there another company now running the same business? Were big payments made to owners or insiders?

As for fees, when a collection agency hands the file to its network of lawyers, the attorney will typically take the case on contingency of around 1/3 of what he or she collects, and the creditor pays any lawsuit costs up front. Unlike with personal debt, a federal consumer protection law called the Fair Debt Collection Practices Act (FDCPA) doesn’t protect business debtors from unfair collection tactics. It only covers personal, family, or household debts. Can the creditor add its lawyer’s fees to what you owe? In Texas, only if you don’t pay the just amount within 30 days after the claim is presented, on a contract case.

There’s also timing. A creditor usually only has a certain amount of time to file the lawsuit to begin with. For a contract to sell goods, the claim must be filed within four years after the cause of action accrues. The sale contract can reduce this to as little as one year, but never make it longer than four years.

Once you’re served, the clock is short. In federal court you generally have 21 days to answer, but in state court the deadline varies. If you don’t appear and the creditor’s claim is for a fixed sum, the clerk of the court must enter default judgment for that amount plus court costs once the creditor files an affidavit with the court.

If you have a defaulted SBA loan, it may not work like a normal debt. The SBA will usually turn it over to Treasury Cross-Servicing by 180 days delinquent. There, Treasury can offset federal and state payments to you, use private collection agencies, garnish wages administratively, report to credit bureaus, and refer the debt to the Justice Department to sue you.

Don’t ignore a lawsuit. Find your answer deadline and work back to a timeline. Pull the contract, look at the signature page, and see what it says. Did you sign just as “Member” of the LLC, just as owner, just as the company itself? Or did you sign in a separate “Guarantor” section? If you signed only for the company, maybe the creditor shouldn’t be suing you personally. Gather the agreement, operating agreement, bank records, correspondence.

Dissolving the LLC doesn’t wipe out the debt. Get legal advice before moving major assets, or closing or dissolving the LLC.

For the future, check that the LLC owns its own bank account in its own name, it’s listed that way on contracts and checks, you sign as the company’s representative, and you document owner draws and loans. While you can be sued on a debt you guaranteed, it’s easier to protect against a veil piercing if the LLC is treated as a separate business.