This article was originally published in The Pennsylvania Observer / Pennsylvania Beverage Media in October 2024. A pdf version can be found here.
Licensees holding an alcoholic beverage license in the name of a corporation or limited liability company (LLC) should be aware that the officers, directors, and shareholders of a corporation or the members of a LLC generally cannot be held personally liable for its debts. That is the main benefit of the corporate entity, whether it is a corporation or an LLC. The individuals are therefore shielded from its obligations, with it often said that they’re protected by the corporate veil. However, there are a number of exceptions to this general rule. If any of these exceptions apply, a creditor can attempt to collect the debt against the individuals personally. Here are a few of these exceptions.
PERSONAL GUARANTEE
If you personally agree to repay a debt of the corporation, you will be held liable to repay it. Sometimes a creditor will refuse to extend credit to a corporation because it has insufficient assets, bad credit, or just a short operating history. The creditor will require an officer or member to sign a paper personally agreeing to the debt. If the corporation or the LLC fails to repay the debt, for any reason, the creditor will come after the officer or member personally.
Be very careful when signing any paper given to you by a creditor to sign. If it has a signature line which does not clearly indicate that you are signing only as an officer of the corporation or as a member of the LLC, it may very well be a personal guarantee. Read the paper carefully to make sure that you are not agreeing to repay the debt personally. If the language of the document is not absolutely clear, or if you have any questions, consult your attorney before signing.
FAILURE TO OBSERVE CORPORATE FORMALITIES
The corporation or LLC is like a separate person. It must be treated as a distinct entity. Even if you are the sole officer, director, and shareholder of the corporation or the sole member of a LLC, you must treat the corporation as different from yourself, and all of the formalities, conventions, and rituals of the corporate entity must be complied with. Among other things, you must always transact business in the corporate name. Make it absolutely clear to the person you are dealing with that you are acting solely as an officer of the corporation. The individual person does not own the business; the corporation or the LLC does. You are only acting as its representative. This may be difficult to grasp if you are a one-person corporation, but it is important to make this crucial distinction when conducting any business. If you act in your personal capacity, you will be sued in your personal capacity.
When signing documents, it must be made clear that you are signing as an officer of the corporation or as a member of a LLC. If the corporate document is important, it should be attested by the corporate secretary, and the corporate seal affixed.
Observe all corporate formalities. Keep updated minutes of corporate meetings. Conduct annual meetings of the shareholders or members. Read your by-laws or operating agreement carefully, and be sure that you comply with their terms. Never mix personal matters with business matters. Keep your personal assets and debts separate and apart from corporate assets and debts. For example, never use a corporate check to pay a personal bill, like your home mortgage. Never pay a corporate debt with a personal check. Always get paid by corporate check.
If you fail to observe these corporate formalities, the distinction between you and the corporation will be lost, and you will lose the protection of the corporate shield. You will allow a creditor to pierce the corporate veil and come after you personally.
It is a good idea to periodically review with your attorney your corporate books and records to make sure that you are observing all of these formalities.
