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What is my liability of credit lines and debt of an S-Corp if I did not personally sign any contract or promissory note?
Atlanta, GA
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Posted 9 months ago in Debt / Lending Agreements
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My wife and I are equal partners with another individual. He is the President of our S-corporation.
Over the years there have been lines of credit and loans established for cash flow and payroll expenses. All of these liabilities were signed by the president. Business has declined over the past year and some of the credit lines have been used to payoff other debt and has snowballed into a real mess. With the debt load so hi, the business can potentially close its doors because it cannot cover operating costs along with being current with existing credit lines and loans. It was recently discovered the partner had taken out an exorbitant amount of shareholder loans to cover personal debt. This has directly affected cash flow to the business's ability to operate. Our partner is contemplating personal bankruptcy. If the business doors are closed, what is our liability to the existing credit lines and loans; all of which do not have my or my wife's signature? - Is this your question? Add additional information Answers (1)
Kevin M. Veler
This attorney is licensed in Georgia and 1 other state.
Posted 9 months ago.
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This is a matter that should be reviewed by counsel to determine your specific issues and liabilities. Generally you would not be liable individually for loans made to the corporation provided you did not sign a personal guaranty and the loans were made to the corporation and not to you individually. However, there may be other claims by creditors of fraud, piercing the corporate veil or similar matters to assert you personal liability. There also as some debts for which officers may have personal liability (such as failure to pay withholding taxes of employees, security deposits or other similar accounts). Also some credit applications that suppliers provide have buried clauses that the person signing is personally liable (whether these are enforceable or not is another question but you should be aware of these in planning an exit).
If you were unaware of the shareholder loans, it sounds as if there may have been some issues about whether the minute book and other corporate formalities were followed. There also may be claims against the officer who took money as "loans". You should also consult with your accountant regarding any possible tax consequences. This answer and any information contained in this answer is not intended to be treated as legal advice. This posting does not create an attorney-client relationship or privilege of any kind. |
