Are You Personally Liable When You Close a Corporation?

by Erika Waters
Properly shutting down your business can prevent headaches down the road.

Properly shutting down your business can prevent headaches down the road.

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Most corporation shareholders don't enjoy considering the possibility of going out of business. For that reason, many people put off planning how they will go about wrapping up their company's affairs in such an event. A big concern for corporation shareholders is whether they will be liable for the company's debts and obligations after it closes. In some situations, a shareholder might be held personally liable for the corporation's debts, but the good news is that steps can be taken to reduce or eliminate the liability beforehand.

Procedure

Follow any procedures set forth in your corporate bylaws; this is the most important thing you can do when dissolving a corporation. Additionally, your state will mandate certain procedures for the proper dissolution of your corporation. You state's secretary of state also provides a list of specific procedures you must follow. The first step towards dissolving your corporation requires taking a vote of the shareholders. At the conclusion of your dissolution, ensure that you receive documentation, such as a certificate of dissolution, that confirms you have properly dissolved the corporation. All dissolved corporations must disclose their dissolved status to the IRS by filing a Form 966. Following these procedures can reduce your chances of being held personally liable for the corporation's debts.

Piercing the Corporate Veil

The corporate veil typically shields a corporation's owners from its debts and obligations. However, that shield can be broken when owners fail to adhere to certain formalities that are necessary for operation -- like failing to keep minutes of board minutes and commingling personal and business funds. When these formalities are disregarded, the corporate veil will be pierced and individuals may be held personally liable for the business's losses. Even after a corporation has been dissolved, the corporate veil may be pierced based on conduct that occurred during its operation.

Bankruptcy

If you are closing your corporation in connection with a bankruptcy, you also may have concerns about personal liability. A bankruptcy proceeding wipes out the corporation's debts in conjunction with a plan approved by the bankruptcy court. However, you still may be liable for debts if you made personal guarantees or pledged personal assets to the corporation.

Personal Guarantees

A corporation's owners may be liable for its debts that they personally guaranteed. For example, a corporation might not have had sufficient credit to receive a loan. If that was the case, one of the owners might have backed the loan with his own credit and offered a personal guarantee. By executing the guarantee, the individual agreed to be personally liable and, as such, he will be liable for the debt should the corporation close.