Can An Ohio Business Owner Be Personally Liable For The Company’s Debts?

Among the main reasons why entrepreneurs set up an LLC or corporation is that they do not want their personal financial matters and business affairs to get mixed up. If the firm cannot meet payment to a creditor, gets sued, or becomes involved in any other situation resulting in debt, the entrepreneur’s house, cash, and other personal property are not normally used to settle the company’s debts.

Yet, limited liability has its limitations, and under some conditions, the Ohio firm owner will become personally liable for its obligations.

Ohio LLCs generally protect their owners 

Ohio LLC statutes provide substantial protections to LLC members. According to the Ohio Revised Code 1706.26, a person will not be held responsible for any obligations or liabilities that arise from contract, tort, or other means.

This difference is very relevant when there are problems with the business entity’s finances. In such situations, the creditor who sues the LLC usually cannot go after the owner’s assets. However, there are several exceptions.

Personal guarantees can create personal liability 

Entrepreneurs often face situations where they have to sign a personal guarantee while getting or making an important business deal. A bank, landlord, vendor, or anyone else will work for the company only if they sign a personal guarantee.

In that case, the limited liability of an LLC will not help the owner avoid responsibilities in accordance with the signed agreement. If the debt is not paid, then the creditor may have rights to go after the guarantor in accordance with the terms of the agreement.

Therefore, entrepreneurs should know what they sign. The contract made on behalf of an LLC will have completely different implications for the owner than the agreement made personally.

When courts can “pierce the corporate veil” 

The other problem an entrepreneur might face is referred to as “piercing the corporate veil.” This doctrine may give a court an opportunity in some cases to ignore the separation between a company and its owner to make the owner personally liable for some actions of the business entity.

In Ohio, the doctrine of veil-piercing is recognized as a principle that, depending on certain circumstances including control over an entity and its fraudulent activity, an owner of the business entity may become personally liable.

Notably, current Ohio LLC law specifically states that lack of compliance with formalities related to the management of an LLC and the exercise of powers of an LLC is not an independent basis for personal liability of an LLC member.

Owners can be held liable for their own conduct 

It is not true that the creation of the company will protect someone against being sued because of their own wrongdoing. Limited liability will only protect the owner against those kinds of liabilities which result from the ownership of the company; limited liability is not a license to do as you please using the cover of an LLC.

This difference can be especially significant in cases where close companies, contracts, and creditors are involved.

Talk to a Columbus, OH, General Counsel Business Representation Attorney Today 

Kohl & Cook Law Firm, LLC, represents the interests of Columbus businesses in their various dealings with other businesses and the public. Call our Columbus general counsel business lawyers today to schedule an appointment, and we can begin discussing your next steps right away.