August 1, 2013
A business experiencing financial difficulty will typically be forced to allocate its scarce resources toward payment of only some of its creditors. In that process, it is important to keep in mind that for some types of business debts, the owners or officers of the business may have personal liability for these debts if they remain unpaid, notwithstanding that the business is a corporation or limited liability company. Some of the business debts that carry potential personal liability to the principals of the business are as follows:
Federal tax withholding liability for the employees’ portion of income taxes and social security (FICA) taxes. Personal liability generally depends upon whether the individual has control of the corporate affairs, such as check writing authority, and knowledge that corporate funds are being used to pay other bills instead of the withholding liability.
Connecticut sales and use taxes. Personal liability is imposed on any officer who is responsible for or has supervision of filing the sales tax return or paying the tax.
Employee wages. Personal liability can attach for unpaid wages for the individual who is the ultimate responsible authority for setting the hours of employment, paying the wages and is the specific cause of the wage violation. The unpaid employee(s) are entitled to double damages and attorneys’ fees.
Employee contributions to employee benefit plans qualified under the Employee Retirement Income Security Act of 1974 (“ERISA”). Personal liability may flow to an individual for deductions that are made from employee wages for contributions to an employee benefit plan, but that are used elsewhere in the business. The individual must exercise authority or control over the management or disposition of plan assets and have a role in deciding which of the company’s creditors to pay.
Personal guarantees. A personal guarantee is an agreement, in writing, to be responsible for the debt of another. Personal guarantees of business debts will be effective against anyone signing such a guaranty, not just an owner or officer of the business. One type of guarantee that is often overlooked will sometimes be found in the fine print of an initial credit application submitted by the business to an important vendor.
Insider payments. An “insider” of the business, such as an officer or director of a corporation or a relative of an officer or director, may be liable to creditors to return payments he or she may have received from the business to the extent that: (a) the payment was made on account of a pre-existing debt to the insider; (b) the business was insolvent at the time the payment was made and the insider had reasonable cause to believe the business was insolvent; and (c) an action is brought by a creditor of the business for recovery of the payment on the grounds set forth in (a) and (b) above, within one year of the date on which the payment was made.