If a business partnership goes sour or a business incurs too much debt, you could find yourself in an expensive situation, responsible for more debt than you personally incurred.
My business partner and I started a business in California. We were set up as an LLC and are taxed as an S Corp.
My business partner used his personal credit cards to pay for a variety of business expenses including dinners, events, trips, etc.
I do not have and have never had access to these cards. Am I personally liable to repay his debts?
The other aspect of this situation includes a business credit card that is in my name with $3,500 debt I amassed. My partner racked up over $18,000. Am I obligated beyond my portion?
Further, our partnership was a 60/40 split. However, my partner made most decisions and frequently stated he was responsible for finding the services we promote. I was more of an “employee” than business partner. I never had access to any business checking or credit card accounts or statements. Despite my repeated requests, he never provided and still refuses to provide statements.
My business partner states he moved debt across several credit cards and it was difficult for him to track. Again, am I personally responsible for these debts?
Lastly, I took payment advances from future commissions in the amount of $8,000, along with the credit card debt I added of $1,500, for a total of $9,500. I brought in commissions in excess of $12,788. My partner is stating that these payments do not apply to the debt, despite similar advances to another employee, who repaid debt via commissions.
Is this true that my commissions would not cover my amassed business debt? He is threating to garnish my payroll wages from my employer, and is saying he will take me to small claims court for the personal advances. Am I liable for his personal credit card debt, and would I owe more than the commission advances already paid? Thank you for your time. – Jason
I can’t sugarcoat this. You’re in a very messy and potentially costly situation with a partner who seems, at best, very disorganized and, at worst, shady. Please speak with an attorney who has experience in dealing with credit-related issues for small businesses as soon as you can, so the situation doesn’t snowball.
When you registered as an S Corp. with the state, you may have filed articles of incorporation or bylaws with the state. They may have addressed how any debt you personally took out for the business would be paid. If you set up an operating agreement when you formed the LLC, also check that. Either one may have provisions that address your question, according to attorney Andrew Sherman, a Washington, D.C.-based partner at Seyfarth Shaw LLP who has advised many small-business clients.
Look at any paperwork you filed with an attorney to make sure you understand what your obligations were. If you did not file any such paperwork, you will need to research any default agreements the state has put in place in the absence of one.
As I mentioned in an earlier column, “Small-business options for dealing with supplier debt,” in an LLC or a corporation, if you have not personally guaranteed a debt, a vendor should not be able to sue you for it. However, credit card debt is different from trade debt. If you or a partner put debt on a personal credit card you opened, you very likely had to personally guarantee it, unless there was another guarantor. The credit card issuer will go after the person who personally guaranteed the card if the debt is not paid.
The same holds true on most small-business credit cards. The card issuer considers the person who guarantees a debt responsible for it.
Even if your operating agreement spells out how you and your partner have agreed to divide the debt, the credit card issuer is not privy to that. It is hard to see how the card issuer could pursue him if he did not assume legal responsibility for the card.
As for the debt your partner says he moved among several cards and now cannot substantiate, it seems like it would be hard for him to prove you are responsible for it. Even if your operating agreement says you are responsible for it, I don’t see how he could actually make you pay it unless he can secure documentation on what was spent. That said, he probably can obtain the documentation by requesting his old credit card records from the card issuers, if he is willing to invest some time. If he does that, it is possible he could enforce the operating agreement.
As for the payment advances against your commissions, you would need to look at any written agreements you signed to determine if, in fact, your partner is correct in saying that your $12,788 in commissions do not count toward the debt. Was there a provision in the document that covers how the payments were to be made? If no agreement was put in writing and your partner pursues it, it seems like you may need a lawyer to help you dispute his claims. It is hard to envision a court allowing your partner to garnish your wages if there was no legal agreement covering the advances. It is possible the interest rate was so high that you did not pay back all of the debt, but your partner would need to prove this in court.
Looking at this situation as a neutral third party, I don’t get the impression you knew your partner very well. Clearly, there is little trust between you and your business partner. I don’t understand why your business partner would not share the company’s bank statements with you or why you cannot simply get them yourself – unless you were not party to the bank account.
Withholding information like this seems like a huge red flag. I would suggest that when you talk with an attorney, you discuss the possibility of disbanding the business. A partner like this can only mean trouble for you in the future.