Carelessness Can Make You Personally Liable for Company Debts
When performing an act intended to be the act or obligation of a corporation or limited liability company, one must make certain that the person with whom he is dealing is aware the act is not an act of his individually. Carelessness and inattention can make you liable personally for a debt of a corporation.
A defendant in a case involving a lease of a building learned that lesson in a costly way. The written lease recited that the parties were "R. H. Wilkinson, as Lessor, and Suntan's Unlimited, as Lessee." The signature line of the lease described the lessee as "Suntan's Unlimited, By: Val Sweeney." Suntan's Unlimited was not described as a corporate entity anywhere in the body of the lease, and nowhere in the lease was Sweeney referred to as appearing and acting as an officer of a corporation. Nevertheless, when the lessee paid the rent each month, it was with checks drawn on a checking account of a corporation, those checks clearly identifying the lessee as "Suntan's Unlimited, Inc."
The lessee defaulted on the rent after eight monthly payments and the lessor filed suit against Val Sweeney personally. The court described the issue as being whether Sweeney had met the affirmative duty imposed on him by law to disclose to Wilkinson that Sweeney was acting on behalf of a corporation. The court stated that "it is imperative that one claiming the benefit of corporate capacity, in order to avoid personal liability, be shielded with the proper documentation … to prove this capacity." Being unable to find the proper documentation, the court held Sweeney personally liable for the company's delinquent lease payments.
Taking proper precautions at the beginning of a business or other contractual arrangement will nearly always prevent unintended consequences at the end. Had Sweeney been careful at the outset, he probably would have been successful defeating any personal liability. At the very least, Sweeney should have insisted the body of the written lease describe the lessee as "Suntan's Unlimited, Inc.," and should have insisted that the signature line of the lease describe the lessee as "Suntan's Unlimited, Inc., By: Val Sweeney, President"; if a limited liability company, "Suntan's Unlimited, L.L.C., By: Val Sweeney, Member."
People should never assume in commercial or business transactions that the person with whom they are dealing is schooled in the way a corporate or limited liability company party to a transaction must be described, or how someone acting in a representative capacity should be described. Even though you may have made it clear throughout the course of weeks of negotiations with a particular person that your actions were on behalf of a company entity, you simply must be on your guard through to the very end, must take sufficient time with the written contract documents before you affix your signature.
Not only must you thus be thorough and mindful to create and maintain appropriate internal records of your company (such as minutes of shareholder and director meetings and other corporate board resolutions), you must be vigilant with your corporation's "external" documents, too, such as contracts, loans and other written agreements it enters into with third persons. If you are careless or inattentive, you can find yourself personally liable for something you intended as a company obligation and possibly even the other party with whom you dealt having initially intend so, too.
Republished | Originally Published on December 1, 2004
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Disclaimer: This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.