Business Debt: 7 Categories and Which Ones Follow the Owner Home

Whether a debt belongs to the company or to the person who runs it is settled mostly by signatures and only partly by the entity chart. The chart supplies the default. The signatures supply the exceptions, and in a small business the exceptions tend to outnumber the rule.

Start with the default. A sole proprietorship has no legal person standing between the business and the household, so its debts are the owner's debts. New York's Partnership Law section 26 makes general partners jointly liable for a partnership's obligations, and jointly and severally liable for some of them. An LLC is different: under New York LLC Law 609(a), a member is not liable for the company's debts "solely by reason of being such member." The word solely carries the whole of what follows. Seven categories of business debt, and the routes by which each one can leave the office and arrive at the owner's kitchen table.

1. Secured Loans Usually Arrive With a Second Signature

A bank or online term loan secured by business assets reaches those assets first. Under UCC 9-609, after default the secured party may take possession of its collateral through the courts or without them, provided it does not breach the peace. That remedy runs against the company's property, not the owner's.

The owner is reached through the guaranty. OnDeck's published FAQ, as one example, describes its secured term loans as carrying a general lien on business assets and a personal guarantee, while stating that personal assets are not taken as collateral. A guarantee does not need collateral to be collectible. It needs a judgment, and a judgment against a guarantor can be enforced against whatever the guarantor owns that the law does not exempt.

2. Unsecured Loans and Cards Depend on What the Application Said

Without collateral, the lender's only protection is the signers. QuickBooks' term loan page, issued through WebBank, describes a personal guarantee and no business collateral, which is a common enough pairing. A business credit card agreement may make the individual who applied liable alongside the company, and the cardholder agreement, not the card's name, decides that.

Read the application you signed. The operative sentence is often in the paragraph above the signature line.

3. Merchant Cash Advances Guarantee Conduct, Which Can Become Money

An MCA guaranty is usually drafted differently from a loan guaranty. In LG Funding v. United Senior Properties, the owners had executed "a personal guaranty of performance of all the representations, warranties, and covenants" the merchant made, and the agreement allowed the funder to enforce that guaranty if the merchant filed for bankruptcy. A guaranty of performance (which reads at signing like a promise about honesty, and which reads, once a default is declared, like a demand for the full balance addressed to the owner's home, because the same agreement may define a long list of ordinary business events as breaches of the covenants the owner guaranteed) reaches the owner only through a breach.

That makes the list of covenants the real measure of exposure. Changing banks without notice, closing a location, or granting a second funder rights in the same receivables may each be defined as a breach. A slow month, in an agreement drafted as a true purchase, should not be.

Whether a court will read a particular performance guaranty as something nearer to a guaranty of payment is a question the form does not settle.

4. Trade Payables Stay With the Company Unless a Credit Application Says Otherwise

A supplier who ships on open terms extends credit to the business. It reaches the owner only if the owner signed a personal guaranty, and credit applications sometimes contain one in the fine print. Check the application before assuming the vendor's invoice is purely corporate.

5. Leases Bind the Tenant, and Often the Tenant's Owner

A commercial lease and an equipment lease are contracts with the entity, and landlords and lessors know that an entity can close. The guaranty that accompanies the lease is how they plan for that. Its scope varies: some cover the full remaining term, some a capped number of months, some only rent through the date the premises are surrendered.

Closing the business does not end the lease. A guarantor's liability is measured by the guaranty's words, and those words were negotiated at a time when nobody expected to read them again.

6. Taxes and Wages Collected From Others Follow the People Who Controlled the Money

Here the entity shield thins without any signature at all. Federal income tax and the employee share of Social Security and Medicare withheld from wages are trust fund taxes. Under 26 U.S.C. 6672, any person required to collect and pay them over who willfully fails to do so is liable for a penalty equal to the unpaid amount. The IRS identifies a responsible person by duty and power over the money, not by title, and willfulness requires no evil motive; knowing the taxes were due and paying other creditors instead is enough. The employer's matching share is different: it is the company's own tax and is not covered by that penalty.

Sales tax can work the same way. In New York, Tax Law 1133(a) makes every person required to collect the tax "personally liable for the tax imposed, collected or required to be collected," and section 1131 defines those persons to include officers, directors and employees of a corporation, and employees or managers of an LLC, who are under a duty to act for the business in complying, as well as members of partnerships and LLCs.

New York adds unpaid wages to the list. Business Corporation Law 630 makes the ten largest shareholders of a privately held corporation jointly and severally liable for wages owed to employees, and LLC Law 609(c) imposes the parallel rule on the ten members with the largest ownership percentages. Both require the employee to give written notice within 180 days after the work ended, and suit within 90 days after a judgment against the company goes unsatisfied.

A corporate income tax balance, by contrast, generally remains the company's. The distinction between money the business earned and money it held for someone else explains nearly every result in this section, and it is the distinction owners in a cash squeeze are most inclined to blur, since the withheld dollars sit in the same account as the rest and look, on a Thursday afternoon with payroll due Friday, exactly like operating cash.

No settlement company can negotiate these away.

7. A Judgment Binds the Name on the Caption

A judgment against an LLC is a judgment against the LLC. Its enforcement tools, including New York's CPLR 5222 restraining notice, reach the judgment debtor's property and debts owed to the judgment debtor. If the owner was named as a guarantor and judgment was entered against the owner as well, the same tools reach the owner's accounts. The caption decides.

Piercing the veil to reach an owner who signed nothing is possible, and it rests on facts about how the company was operated rather than on the size of the debt.

Where the Categories Meet

Most owners learn which of their company's debts are also theirs from a demand letter. The better source is a file with every agreement, application and guaranty in it, sorted into the seven categories above and marked for each one: company only, company and owner, or owner by statute.

Delancey Street reviews that file for business debt of the second kind, merchant cash advances first among them, and negotiates with the creditors. Not a law firm, it sends legal questions to attorneys licensed on their own account. The review costs nothing and stays confidential at Delancey Street. Trust fund taxes and wage claims belong to a tax professional and to counsel, and nothing a negotiator does will move them.