Business Owner Personal Liability in Bankruptcy

When Business Owners Are Personally Liable

The corporate form (LLC, corporation) generally protects owners from personal liability for business debts. But there are important exceptions:

• Personal guarantees: The most common source of personal liability. Banks, landlords, and major vendors often require personal guarantees. A guarantee survives the business's bankruptcy.
• Piercing the corporate veil: If you failed to maintain corporate formalities (commingling funds, no operating agreement, undercapitalization, treating business assets as personal), courts may hold you personally liable.
• Trust fund taxes: If you failed to remit employee payroll taxes (income tax withholding, employee FICA), you are personally liable under 26 U.S.C. Section 6672. These cannot be discharged in bankruptcy.
• Fraud: Personal liability for fraud committed through the business entity.
• Tort liability: Personal participation in negligent or harmful acts.