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3 ways shareholders fail to limit their liability

Guarantee a Loan

The reason small to mid-size business owners often incorporate is to limit liability but one way they can lose that is to guarantee debt.

Maybe that is not a failure because they did it on purpose but they certainly need to understand that at least for that loan or that contract they are now openly liable personally for that obligation.

Get sloppy…

The second is they get sloppy. I am the President of my corporation and when I sign any legal document it is Linda Keith, President, Linda Keith CPA Incorporated. If you get sloppy and start signing it personally, you might be personally liable.

Failure to pay payroll taxes

The last one might be a surprise and that is unpaid payroll taxes. Payroll taxes, at least in part, are withheld from the employee. They are held in trust until they are turned over to the federal government. So failure to pay payroll taxes isn’t just not paying your own expenses, but it is not turning over a liability that you incurred the moment you withheld it.

It doesn’t do you any good if you are an officer who delegates that responsibility to someone else.  You may still personally be on the hook for any unpaid payroll taxes.

Lenders watch for red flags

In my training on tax return analysis we look at red flags and I’ll tell you, underpaid payroll taxes is certainly a red flag from two directions. One is the unpaid tax liability they have incurred because they have not turned that over.  And the second is, if there is a company that can’t pay their payroll taxes that is a red flag all by itself.

What business owners need to know

So, owners that are trying to mitigate their risk by limiting liability need to know about these three ways they could fail to limit the liability.

About the Author
Linda Keith CPA is an expert in credit risk readiness and credit analysis. She trains banks and credit unions throughout the United States, both in-house and in open-enrollment sessions, on Tax Return and Financial Statement Analysis. She is in the trenches with lenders, analysts and underwriters helping them say "yes" to good loans. Creator of the Tax Return Analysis Virtual Classroom at, she speaks at banking associations on risk management, lending and director finance topics.