Is the business owner responsible for the company’s debts?
In today’s business environment, the situation when enterprises incur debts during their operations is inevitable. However, there is a common misunderstanding that business owners have nothing to do with all debts of their business.
Currently, the Law on Enterprises does not specifically define the term “business owner.” Depending on the type of enterprise, the “business owner” can be understood differently – as a general partner in a partnership, the sole proprietor in a private enterprise, a shareholder in a joint stock company, or the company owner in a limited liability company. In the scope of this article, all these entities are collectively referred to as “business owners”.
Depending on the type of enterprise, the scope of the owner’s liability for the company’s debts will differ. In this article, TNTP will analyze and clarify the question: “Is the business owner responsible for the company’s debts?”
1. What are the debts of an enterprise?
According to the provisions of the Commercial Law 2005, when the parties enter into a commercial contract, the seller of goods or the provider of services has the obligation to deliver goods, transfer ownership of goods, or perform services for the buyer, while also having the right to receive payment from the buyer. In contrast, the buyer of goods or user of services is obligated to make payment and has the right to own or use the goods or services as agreed upon by both parties. Therefore, if an enterprise fails to make payment on time for goods or services it has received, the unpaid amounts are considered debts of the enterprise.
In addition, enterprises may also incur loan debts from credit institutions or other organizations. These loans are typically recorded in loan agreements and serve the purpose of financing the company’s production and business activities. In such cases, the entity with the obligation to repay is the enterprise itself, represented by its legal representative or an authorized representative.
As a principle, the enterprise is the legal subject responsible for fulfilling its own debts. However, a critical question arises: if the enterprise becomes insolvent, is the business owner personally liable for its debts? Under the Law on Enterprises 2020 (“the Enterprise Law”), the extent of a business owner’s liability for the company’s debts depends on the type of enterprise. Accordingly, depending on the case, the owner may bear unlimited liability or limited liability.
2. Cases where the business owner bears unlimited liability
Unlimited liability means that the business owner must be responsible for all the company’s debts and obligations with their entire property, including both contributed capital and personal assets, if the business is unable to pay its debts. This mechanism applies to two specific types of enterprises: partnerships and private enterprises.
According to Point b, Clause 1, Article 177 of the Enterprise Law, general partners who are individuals are personally and jointly liable with all their property for the obligations of the partnership. Clause 1, Article 188 of the Enterprise Law stipulates that a private enterprise is established by one individual who is personally liable with all their property for all business activities of the enterprise.
Therefore, under the law, partnerships and private enterprises are two business types in which owners bear unlimited liability for the enterprise’s obligations, including debt repayment. For example, if a private enterprise goes bankrupt, the owner must use personal assets to fully pay off the enterprise’s debts. This is one of the reasons why these two business types are generally less favored by investors, as they expose owners to high financial and legal risks.
3. Cases where the business owner bears limited liability
Limited liability refers to the extent of responsibility that business owners must bear for the company’s financial obligations, which is confined within the amount of capital they have contributed. They are not required to use their personal assets to pay the company’s debts. This mechanism applies to three common types of enterprises, including joint stock companies, single-member limited liability companies, and multi-member limited liability companies.
According to Point c, Clause 1, Article 111 of the Enterprise Law, shareholders of a joint stock company are only liable for the company’s debts and other financial obligations within the amount of capital they have contributed. Similarly, Clause 1, Article 74 of the Enterprise Law provides that the owner of a single-member limited liability company is responsible for the company’s debts and other financial obligations within the charter capital of the company. For multi-member limited liability companies, Clause 1, Article 46 of the Enterprise Law also specifies that members are only liable within the amount of capital they have contributed to the company. Thus, in principle, business owners of these three types of enterprises are not required to use their personal property to fulfill the company’s payment obligations.
However, the principle of limited liability is not always applied absolutely. Firstly, in the case of dissolution, Clause 2, Article 207 of the Enterprise Law stipulates that an enterprise may only be dissolved when it has ensured full payment of all debts and other financial obligations and is not involved in any ongoing dispute at court or arbitration. This means that before carrying out dissolution procedures, the business owner must ensure that all of the company’s financial obligations have been fulfilled. In other words, an enterprise cannot arbitrarily terminate its legal status without first settling its debts. Secondly, Article 12 of the Enterprise Law provides that the legal representative of an enterprise is an individual authorized to represent the enterprise in exercising rights and obligations arising from its transactions. If the division of authority among legal representatives is not clearly defined in the company’s charter, each legal representative is deemed fully authorized to act on behalf of the enterprise, and all such representatives are jointly liable for any damages caused to the enterprise in accordance with civil law. Moreover, Clause 2, Article 13 of the Enterprise Law stipulates that the legal representative of an enterprise is personally liable for damages caused to the enterprise due to violations of the duties specified in Clause 1 of that Article. Therefore, in cases where the legal representative exceeds their authority when entering into contracts, causing losses or financial obligations to the enterprise, they may bear personal liability for such damages. In summary, the principle of limited liability is only relative; in certain cases, the law still provides for the owner’s or members’ personal liability for the company’s debts.
4. What can business owners do when the company incur debts?
When debts arise, business owners should take proactive measures to recover or manage them. First, the enterprise should communicate and negotiate with the debtor through a formal payment request letter, clarifying the repayment obligations, agreeing on a payment plan, and assessing the debtor’s financial capacity and the status of any collateral (if applicable).
If negotiations fail, the enterprise may initiate legal action against the debtor at a competent dispute resolution body – such as a court or commercial arbitration center. The enterprise should prepare all necessary documentation and participate actively in the legal proceedings.
Once a court judgment or arbitral award has taken effect, the enterprise has the right to request the enforcement agency to verify the debtor’s execution conditions, apply temporary emergency measures, or seize and dispose of collateral assets to compel repayment.
Throughout this process, lawyers play a crucial role by advising on debt recovery strategies, assisting in proceedings, and liaising with enforcement authorities. To increase the likelihood of successful recovery, enterprises should retain all relevant contracts, payment records, and supporting documents, and consult a lawyer early to choose the most effective and lawful course of action.
5. Practical legal addvice for business owners
For business owners, choosing the right type of enterprise is crucial in determining the extent of their liability for legal and financial risks. They should select a business form that aligns with their operational scale and risk tolerance while ensuring clear separation between personal and company assets. Transparent and well-managed financial practices can prevent situations that lead to personal liability.
For business partners, it is important to thoroughly assess the legal status and financial capacity of the enterprise, as well as the authority of the person signing contracts on behalf of the company. Doing so minimizes risks of disputes or difficulties in debt recovery. Consulting a lawyer before signing contracts is a prudent step to ensure legal compliance, safety, and effectiveness in commercial transactions.
The above article, “Is the Business Owner Responsible for the Company’s Debts?”, is provided by TNTP to help readers better understand the legal responsibilities of business owners.
For further inquiries or discussions, please contact TNTP for detailed consultation.
