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Starting and growing a business in Texas is a major accomplishment, but it often involves taking on financial risk. A common concern among business owners is whether they could be held personally responsible for business debts if things go south. The answer to that question depends largely on the business structure you choose, the nature of your contracts, and how you’ve managed your operations.
In this post, Toronjo & Prosser Law explores how business debt liability works in Texas, when personal responsibility applies, and how you can protect yourself.
Business Structure and Liability
Your business entity type is the most significant factor in determining whether you’re personally liable for business debts.
Sole Proprietorship
In a sole proprietorship, there is no legal separation between you and your business. This means you are personally liable for all business debts and obligations. If the business defaults on a loan or is sued, creditors can come after your personal assets—such as your home, car, or savings—to satisfy those obligations.
General Partnership
Texas general partnerships operate similarly to sole proprietorships when it comes to liability. Each partner is jointly and severally liable for all business debts. In other words, one partner can be held responsible for the full amount of a debt, even if another partner incurred it.
Limited Liability Company (LLC)
An LLC offers personal liability protection to its members. This means that in most cases, your personal assets are shielded from business creditors. However, this protection isn’t absolute—members can still be held personally responsible in specific scenarios (discussed below).
Corporation
Like an LLC, a corporation is considered a separate legal entity from its shareholders. This structure typically protects shareholders from personal liability for the corporation’s debts. However, corporate officers and directors may be exposed to liability in certain circumstances.
Situations Where Personal Liability Still Applies
Even with the protection of an LLC or corporation in Texas, there are several common situations where you might still be personally on the hook:
Personal Guarantees
Lenders often require business owners to sign a personal guarantee before extending credit. By signing one, you agree to be personally responsible for repaying the loan if the business cannot. These guarantees are standard in business loans, leases, and vendor agreements.
Piercing the Corporate Veil
In some cases, Texas courts may “pierce the corporate veil” and hold business owners personally liable if the business is found to be an alter ego of the owner. This typically occurs when:
- Personal and business finances are intermingled
- Corporate formalities are not observed
- The business is undercapitalized
- There is fraud or illegal activity
If a court determines that the business was not truly operating as a separate entity, creditors may pursue the owner’s personal assets.
Misconduct or Illegal Acts
If a business owner commits fraud, misrepresents facts, or engages in illegal activity, they can be personally liable regardless of the business structure. For example, lying on a loan application or failing to disclose significant risks to investors can create personal exposure.
Unpaid Payroll or Sales Taxes
Both the IRS and the Texas Comptroller hold business owners personally responsible for certain unpaid taxes, especially “trust fund taxes” such as payroll withholding and sales tax. These taxes are considered to be held in trust for the government, and failure to pay them can result in steep penalties and personal liability.
How to Protect Yourself
Here are a few steps Texas business owners can take to minimize personal liability:
- Choose the correct entity: Form an LLC or corporation to limit personal exposure.
- Separate business and personal finances: Maintain separate bank accounts, bookkeeping, and records.
- Avoid personal guarantees when possible: Negotiate contracts that do not require you to personally back business debts.
- Maintain corporate formalities: Keep meeting minutes, file annual reports, and follow your company’s governing documents.
- Act ethically and transparently: Avoid misrepresentation and fraudulent behavior in business dealings.
- Consult with a business attorney: Have contracts, business structures, and obligations reviewed regularly to ensure compliance and protection.
What to Do If You’re Facing Business Debt
If your Texas business is struggling to manage its debts and you’re unsure whether your personal assets are at risk, it’s important to get legal advice quickly. At Toronjo & Prosser Law, we help business owners evaluate liability, negotiate with creditors, and, when necessary, explore options such as business bankruptcy or restructuring.
We’ll help you understand your rights, assess your risks, and build a plan to protect your personal and professional future.
Contact Toronjo & Prosser Law Today
Whether you’re forming a business or dealing with overwhelming debt, our experienced Texas attorneys can guide you every step of the way. Contact us today to schedule a consultation and learn how we can help safeguard your assets.