Are You Personally Liable On Business Contracts?

When you sign on the dotted line, do you understand who is actually liable on the contract? Here is what business owners need to know about personal contract liability.

Limited liability companies

A big legal benefit of limited liability companies is that the owners of the company are not typically liable on a personal level for the company’s contracts. Corporations are limited liability, as well as limited liability companies (”LLC”), and perhaps other business forms in your state.

As the owner (or principal or shareholder) of a limited liability entity, you need to make sure to bind your company on its contracts. You don’t want to inadvertently bind yourself on a contract, after you have gone to the trouble of setting up a limited liability entity.

Key words to watch for

There is no substitute for having an experienced attorney review your contracts and assist with any business deals. But you can educate yourself to watch for key words when signing.

Individually / personally – Any words like these should be a red alert. If the signature line says something like “Bob Jones, individually,” it means that you are signing in your personal capacity. You are agreeing to bind yourself to the contract. Watch out!

As / for – A well-drafted contract should show your name, your title, and your company name in the signature block. The words “as” or “for” should denote that you are signing “as” the president of the company or “for” the company.

Example signature blocks

To further clarify what to look for, here are two sample signature blocks.

Personal liability
Bob Jones
_______________

Company liability only
Bob Jones,
as president, ABC Company
_______________

Binding other people personally

Now that you know the basics of personal vs. company liability, you should be aware that you might want to bind your business partners or clients in a personal capacity.

If you are taking on a client who owns a small closely-held corporation or LLC, you should consider personal liability on the contract. The other party may not want to sign personally, but it can always be discussed in your negotiations. Binding your client personally means that you could have extra protection for your business, even if the client’s company goes bankrupt.

Be careful

As in all business dealings, caution is important. Even if you agree to everything a contract says, you must carefully analyze all the words before signing. Don’t bind yourself personally when you really intend to sign for the company.

Photo by Marc van der Chijs