In business activities among enterprises, when the transaction parties are businesses, many people often think that the obligation to pay off debts is solely the responsibility of the company and does not extend to the personal liability of those managing the company. However, in reality, depending on the specific case, the business owner may have to pay the debt with their funds. In the following article, lawyer from TNTP will share their view on the question: “Is the business owner responsible for the company’s debts?”
1. Debts Associated with the Business Entity
According to the Commercial Law of 2005, when parties enter into a contract in commercial activities, the seller/service provider must deliver goods, transfer ownership of goods, provide services to the buyer/service user, and receive payment; the buyer/service user must pay for the goods/services, receive the goods, and obtain ownership of the goods as agreed, or after completion of the service use. Accordingly, the obligation to pay off the debt falls on the buyer/service user corresponding to the value of goods or services in the prior contract/agreement. Therefore, if a business fails to fulfill its obligation to pay for these goods and services on time as committed, these will be debts associated with the business entity.
Besides debts arising from purchasing goods and using services, another type of debt associated with the business entity includes loans from financial institutions or other individuals and organizations. These debts often arise from loan contracts to serve certain activities of the business. In this case, the entity responsible for repayment is the business, confirmed by its representative or authorized person.
2. Responsibility for Repaying the Company’s Debt?
a) Cases Where the Business Owner is Infinitely Liable for the Company’s Debts
• According to Article 177 of the Enterprise Law 2020, individual members of a partnership are liable with all their assets for the obligations of the partnership, including the obligation to pay off company debts.
• Furthermore, according to Article 188 of the Enterprise Law 2020, a sole proprietorship is also a type of business owned by an individual who is personally liable with all their assets for all activities of the business, including the obligation to pay off company debts.
Thus, according to legal regulations, there are two types of businesses – Partnership Companies and Sole Proprietorships – where the business owner will have to bear unlimited liability for the obligations to pay off the company’s debts. This is why these types of businesses are often less chosen by investors to establish a company in business activities.
b) Cases Where the Business Owner is Limitedly Liable for Debts.
• As per the regulations of the Enterprise Law, other types of businesses including Single Member Limited Liability Companies, Limited Liability Companies with two or more members, and Joint Stock Companies are all stipulated to be liable for the company’s debts and other asset obligations within the limit of their contributed capital or charter capital.
• In these types of businesses, if the company incurs debts in its business activities, the business owner will only have limited liability, specifically within the extent of their contributed capital or charter capital. In other words, in these cases, the debts of the company will only be paid off with the company’s assets or revenue from business activities, and the business owner will not have to be personally responsible for paying these debts with their assets.
This is the main reason why Limited Liability Companies and Joint Stock Companies are chosen by investors to participate in business activities due to the low liability involved. However, it is these types of companies that often generate many bad debts that are difficult to recover because when the company is no longer able to pay, there is no way for creditors to recover the debt since the business owner and those who contribute capital will not be personally liable for the company’s debts.
This article by TNTP’s lawyer covers the topic: “Is the business owner responsible for the company’s debts?”. We hope this article brings value to the operations of businesses.