Personal Liability Examples

In a sole proprietorship the owner, spouse, family and partners are personally liable for the company and have unlimited personal liability for loss, thus placing all their personal assets and wealth at risk.

This means that if the sole proprietor business doesn't pay a supplier, defaults on a debt or loses a lawsuit, the creditor can legally come after all related parties' assets and valued possessions.

Additionally, should a negative event happen personally for a sole proprietor or related parties it would have negative consequences against the business and assets.

Examples:

1): Lester is the owner of a small manufacturing business. When business prospects look good, he orders $50,000 worth of supplies and uses them in creating merchandise.

Unfortunately, there's a sudden drop in demand for his products, and Lester can't sell the items he's produced. When the company that sold Lester the supplies demands payment, he can't pay the bill.

As sole proprietor, Lester is personally liable for this business obligation. This means that the creditor can sue him and go after not only Lester's business assets, but his (Spouse, family, partners) other property as well. This can include their house, car, personal bank accounts and anything else of value.

2): Shirley is the owner of a flower shop. One day Roger, one of Shirley's employees, is delivering flowers using a truck owned by the business. Roger strikes and seriously injures a pedestrian.

The injured pedestrian sues Roger, claiming that he drove carelessly and caused the accident. The lawsuit names Shirley as a co-defendant. After a trial, the jury returns a large verdict against Roger – and Shirley as sole proprietor of the business.

Shirley is personally liable to the injured pedestrian. This means the pedestrian can go after all of Shirley's (Spouse, family, partners) assets, business and personal property, including their home, cars, bank accounts, etc.

3): Mike runs a small, successful investment consulting business conducted as a sole proprietor under a fictitious business name (dba).  Mike has several partners in projects that are providing good returns.

Mike's wife, Maggie, has recently been diagnosed with an aggressive, life threatening illness that needs immediate and expensive treatment. Mike as a sole proprietor has not had access to certain corporate benefits including health insurance.

Mike's attorney has cautioned that Mike, as a sole proprietor personally linked to assets, may need to immediately liquidate the projects secondary to medical expenses that Mike is unable to pay. This will negatively impact his partners' equity and return in the projects and they may sue.

Personal bankruptcy and liquidation of all non essentials as deemed by the court may be the only financial option for Mike and Maggie. Hopefully, Maggie's medical needs will not be compromised for inability to pay.  The partners will be liable for all negative financial consequences of the projects.

Note: a properly formed, organized and managed LLC or corporation would not keep the negative events mentioned from occurring but it could have protected all related parties from the devastating financial liability and consequences.

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