This is a guest post by San Francisco Business Attorney, Trevor Caudle. This post addresses ways to dealing with a failing small business and the personal responsibility of the small business owner. Trevor also addresses the risk of piercing the corporate veil.
Perhaps the single greatest motivating factor in an individual’s decision to form a corporation or limited liability company is - you guessed it - to limit their personal liability. Well, what does this really mean? When we talking about “limited liability”, we literally mean taking the financial responsibility for casualties and debts and removing it from the shoulders of individual human owners and placing that responsibility at the feet of a legal entity - generally a corporation or limited liability company. Often, when the months and years pass, owners of these legal entities forget the power of this central benefit. They forget that in times of financial strife, the entity is responsible for the debts facing the entity and not the individual owners.
Assuming the corporate structure is maintained properly, and no formal personal guarantees have been made, a company can often simply walk away from its debts by dissolving. The liabilities, debts and contractual obligations will simply disappear with the folding of the company with no transfer of responsibility to the individual owners. This applies to credit card debts, small business loans, leases, pending lawsuits, vendor invoices, etc.
Now, of course it isn’t quite that simple. Creditors must be notified, assets properly transferred to appropriate recipients (read: not the personal savings accounts of the individual owners), documents filed with the secretary of state, and - quite often - angry phone calls from creditors must be handled. For these reasons and more, it is highly advisable that the owners of a corporation or limited liability company seek legal counsel at the outset of any conversation where dissolution is being considered as a possible course of action.
In the event the dissolution is not handled properly, the owners of a company can quite easily stumble into a situation where they obliterate the very corporate protection from which they were hoping to benefit. “Piercing the corporate veil” is one of those legal phrases many people have heard, but few completely understand. The concept boils down to this - if a legal entity is simply a facade, and the facts of a given case reveal that the owners of an entity have not operated the entity as something that is separate from themselves as individuals, the facade will be torn down by the courts and the owners will be left to fend for themselves, stripped of the corporate protection, and subject to personal liability for the debts and obligations discussed above.
Accordingly, an attorney must often review corporate records prior to dissolution in order to ensure that everything is in compliance. Just like filing for bankruptcy, most dissolutions require some manner of housekeeping and planning prior to filing anything with the secretary of state.
If you are a shareholder of a corporation, or a member of a limited liability company, and you have run into a financial predicament wherein you simply do not believe that you can continue to operate the business, I urge you to seek an attorney’s counsel to determine whether dissolving the entity and walking away from its debts and obligations is a viable option.
About Author: Trevor Caudle is a graduate of Santa Clara University School of Law. Trevor opened his firm, Trevor Caudle Law Practice, two years ago and focuses on providing general legal advice and litigation counsel to small businesses and individuals with a uniquely efficient, economical and intelligent approach.
Trevor Caudle Law Practice
350 Bay Street
San Francisco, CA 94133
(415) 260-0947
