Can a Supplier Sue Me Personally for My Company’s Unpaid Invoices?

Because corporate and LLC ownership provides limited liability, you are usually not on the hook personally for the unpaid invoices. But if the supplier can prove that you signed a personal guarantee, or that you were a sole proprietor, you may be stuck.

One of the major reasons businesses form LLCs and corporations is to protect business owners from their business debts and liabilities. So if the LLC owes an outside vendor money, the LLC is responsible for that debt. However, in most cases, the LLC’s owners or managers do not need to step in and pay the debt. The law is different if you did not establish an LLC, but operated the business as a sole proprietorship instead. A sole proprietorship is not a business separate from its owner or manager. This means the supplier can collect unpaid invoices from you personally. In a limited partnership, the general partner has unlimited liability for the business’s debts, but the limited partners have limited liability. All the partners in a LLP, however, have limited liability for partnership debts.

Personal Guarantee

Many suppliers require a personal guarantee before granting credit to your business. You may be surprised to learn that you signed a personal guarantee, even if you cannot remember doing so, especially if the credit application was long and complex. Personal guarantee language can be buried deep in the fine print that you probably did not bother to read. Obtain a copy of your supplier’s credit application and look through the fine print for the following words and phrases: ”personally guarantee,” “I guaranty” or ”individually liable.” This type of language signals that the supplier requires you to take responsibility for your LLC’s debts and liabilities, just as if you had signed the debt agreement personally.

If you signed a personal guarantee, then your LLC is not your liability shield. Once you sign a personal guarantee, a creditor has the ability to chase you personally, and even sue you individually, for the unpaid balance on the debt. The creditor can pursue you personally regardless of what happens to the LLC. Even if the LLC goes out of business or files for bankruptcy, you as an individual are still on the hook for the debt. Personal guarantees can also include language that requires you to pay attorney’s fees and other costs that your LLC’s supplier incurred in collecting the debt.

The personal guarantee you signed may be broad in scope. That means that it could cover all current and future invoices and transactions between you and your supplier, until the day you sign a written release from the supplier. Moreover, the supplier could continue to demand payments under that guarantee even after your LLC has ceased operations.

Under the guarantee, the supplier may reach your bank and investment accounts, and may even seize those funds, potentially harming your ability to pay your day-to-day bills and expenses. Worse yet, if more than one person signed a personal guarantee on behalf of the LLC, the supplier may try to get each of you for the full amount. However, some states allow you to exempt your home and some of your retirement accounts.

In some situations, you may be personally liable to suppliers even without a guarantee, although the business operated in the form of a corporation or an LLC. This can apply if you actually signed the supplier’s credit agreement or invoice without using an LLC or corporate title, such as: Chief Executive Officer (CEO), President, Manager, Owner or Director.

Piercing the Corporate Veil

You may incur liability for an LLC debt even if you did not sign a personal guarantee or operate as a sole proprietor. That can happen when a court holds the owner personally liable for a debt under the ”piercing the corporate veil” doctrine. This doctrine allows a court to set aside the limited liability feature of your corporation or LLC, under certain circumstances. Courts do not like to do this. They generally reserve it for serious misconduct. One reason for courts to pierce the corporate veil is when owners commingle personal and business funds, as if there were no separation between the two entities. Another is undercapitalizing the company when it is formed.

As for personal guarantees, some states have a statute of frauds requirement, meaning that any promise to pay debt of a third party must be in writing and signed by the guarantor. The Uniform Commercial Code generally requires any supplier suing over the sale of goods to file a lawsuit within four years after the breach.

Get a copy of any agreements or contracts your company may have signed with the creditor. Review the documents thoroughly for personal guarantees that hold you accountable for the unpaid debt. If you are liable, you may be able to negotiate to repay the debt for a discounted lump sum or to repay the debt in regular installments over a period of time. Any agreement that you can negotiate should be put in writing and signed by both you and the creditor.

Individuals can file for bankruptcy to discharge or reduce an unpaid invoice debt. However, if a court determines that the business actually made fraudulent purchases, the debt might be non-dischargeable. Bankruptcy law is specialized and complex. You may want to discuss your case with an attorney. Whether or not bankruptcy is a viable option may depend on your personal financial circumstances.