You’re owed $75,000 by ABC Services LLC. You sue and win. The judge orders ABC Services to pay.
Problem: ABC Services closes down. The owner starts a new business under a different name. You get nothing.
This is why the difference between business debt and personal debt matters. LLCs and corporations shield owners from personal liability — unless you have a guarantee, or a court sets that protection aside.
This guide explains the differences, how personal guarantees work, and when an owner can be reached individually.
Business Entities 101
How Business Structures Affect Debt Collection
Sole Proprietorship
- Owner and business are the same legal entity
- No liability protection (owner personally liable for business debts)
- Simplest to pursue: the claim runs against the individual and their non-exempt assets
Partnership (General)
- Multiple owners, generally personally liable
- No liability protection for the partners
- Similar: the claim can run against a partner individually
Limited Liability Company (LLC)
- Separate legal entity from its members
- Strong liability protection (members generally not personally liable for company debts)
- Harder to collect: recovery normally comes out of company assets
Corporation (Inc., Corp)
- Separate legal entity from its shareholders
- Strong liability protection (shareholders generally not personally liable)
- Harder to collect: recovery normally comes out of corporate assets
Key insight: LLCs and corporations exist specifically to protect owners from personal liability. That’s their main purpose, and it’s legitimate.
The LLC/Corporation Shield
Why an Entity Can Owe You Money and Still Not Pay
Scenario:
- John Smith owns ABC Services LLC
- ABC Services owes you $50,000
- You sue ABC Services and win
- ABC Services has $2,000 in its bank account
- John Smith personally owns a house, personal savings, and a car
The problem:
- Your judgment is against ABC Services, the entity you sued
- ABC Services has $2,000
- John Smith’s personal assets are outside that judgment
- John closes ABC Services, opens XYZ Solutions LLC, and keeps operating
You’re out $48,000.
This is lawful and it’s common. It is exactly why people form LLCs.
Personal Guarantees: The Difference-Maker
How to Get Past the LLC Shield Before You Need To
Personal guarantee = an individual’s written promise to pay if the business doesn’t
What it does:
- Puts an individual on the hook alongside the entity
- Lets your claim run against the owner as well as the company
- Turns a dead-end judgment into one with somewhere to go
Example with a personal guarantee:
- Same scenario — ABC Services owes $50,000
- But John Smith signed a personal guarantee
- Your claim now runs against ABC Services and John Smith individually
- ABC Services has $2,000
- John’s non-exempt personal assets come into the picture, and that changes the negotiation
The caveat that gets skipped: a guarantee makes an individual liable; it does not override exemptions. Texas exempts a homestead and a defined list of personal property from creditors (Tex. Prop. Code Ch. 41 and Ch. 42), and current wages for personal services are exempt from garnishment for ordinary debts (§ 42.001(b)(1)). A guarantee is real leverage — often the difference between a collectable account and a write-off — but it isn’t a key to everything the guarantor owns.
A guarantee is also only as good as its wording. Whether a particular one is enforceable depends on its language and the facts. Have counsel draft it, and have counsel read it before you rely on it.
When Personal Guarantees Matter Most
High-Risk Situations
Ask for a personal guarantee when:
- New business (<2 years old, no track record)
- Small LLC (single-member or few members, easy to dissolve)
- Thin capitalization (business has minimal assets)
- High-dollar transactions relative to your balance sheet
- Red-flag clients (poor payment history, existing judgments)
How to get it:
- Put the guarantee in the credit application or contract, drafted by counsel
- Have the individual sign in their own name, separately from the signature made for the entity
- Make the language unambiguous about who is liable for what
Illustrative guarantee language — not a form, and not a substitute for counsel:
“The undersigned, [Owner Name], personally guarantees payment of all amounts owed by [LLC Name] under this agreement. This guarantee is unconditional and remains in effect regardless of business dissolution, bankruptcy, or transfer of ownership.”
Signed: _________________________ Date: __________
Enforceability, scope, notice, and waiver terms are all drafting questions with real consequences. Don’t copy a clause off the internet — including this one.
Piercing the Corporate Veil
When an Owner Can Be Reached Without a Guarantee
“Piercing the corporate veil” = a court sets aside the limited-liability shield and holds an owner responsible for the company’s debt
It is not a collection tactic. It is litigation — pleaded and argued by licensed attorneys, decided on the facts, and not granted casually. Courts start from the premise that the entity is real.
The arguments courts hear:
1. Fraud or Misrepresentation
- Misstatements about the business’s financial condition
- An entity formed specifically to escape an existing obligation
- Assets moved to a new entity to keep them from creditors
2. Commingling of Assets
- No separation between business and personal finances
- The company account used for personal expenses
- Personal accounts used to pay company obligations
- “Alter ego” — the company operated as an extension of the individual
3. Undercapitalization
- Formed with minimal assets relative to the obligations taken on
- No meaningful capital contributed
- No realistic ability to pay the debts it incurred
4. Failure to Observe Formalities
- No governing documents
- No separate bank account
- No books or records
- Contracts signed by an individual without indicating a representative capacity
5. Fraudulent Transfer
- Assets moved out of the entity after the debt was incurred
- Done to put them beyond a creditor’s reach
- The familiar pattern: close ABC Services, move the equipment to XYZ Solutions
What a Veil-Piercing Investigation Actually Looks At
Illustrative hypothetical — not a real ASA file, not a client, and not a prediction about any account.
A single-member LLC owes a supplier. The entity has almost nothing in it. The member does have assets. Everyone’s instinct is to go straight at the member — but a court doesn’t disregard an entity because the entity is broke. It looks at how the owner treated it.
The facts that matter are documentary, which is why investigation comes before the legal theory:
- Whose account paid for what. Personal spending run through the company’s account, or company obligations paid out of a personal one.
- Whether the entity was ever run as an entity. Governing documents, separate books, filings, a real bank account.
- How the contract was signed. In the company’s name, in a representative capacity, or by an individual who never indicated one.
- What happened to the assets. Equipment, customer lists, and staff turning up at a newly formed company with the same ownership, on a timeline that lines up with the debt.
Two honest caveats. First, this is litigation — filed and argued by licensed attorneys, and courts don’t set limited liability aside casually. Second, winning the argument is not the same as getting paid: Texas exempts a homestead and a defined list of personal property from creditors (Tex. Prop. Code Ch. 41 and Ch. 42), and current wages for personal services are exempt from garnishment for ordinary debts (§ 42.001(b)(1)). A judgment against an individual in Texas is not a key to everything that person owns.
Which is the argument for the boring version: get the guarantee in writing before you extend the credit. For what enforcement looks like once a judgment exists, see how to collect a judgment in Texas.
Business Debt Collection Strategies
How to Collect from LLCs and Corporations
Strategy 1: Get the Personal Guarantee Up Front
- The cheapest protection there is
- Makes the account collectable instead of theoretical
- Costs nothing at the point of sale, when you still have leverage
Strategy 2: Build the Veil-Piercing Record (If There’s No Guarantee)
- Investigate how the entity was actually operated
- Look for commingling, missing formalities, undercapitalization, transfers
- It requires litigation, so it goes to counsel — and only where the balance justifies it
Strategy 3: Follow the Assets to the New Entity
- Where a company closed and reopened under a new name
- Fraudulent-transfer and successor-liability theories exist for this
- Both are claims brought by attorneys, on facts you have to be able to prove
Strategy 4: Garnish the Company’s Bank Accounts
- After a judgment, post-judgment garnishment can reach non-exempt property including bank accounts (Tex. Civ. Prac. & Rem. Code Ch. 63)
- It runs through the court, which means through counsel
- Identifying the right institution first is investigative work, and timing matters
Strategy 5: Reach Non-Exempt Business Assets
- Equipment, inventory, receivables
- Where there’s no guarantee, this may be what’s actually there
Personal Debt vs. Business Debt: Legal Differences
Collection Rules That Differ
| Aspect | Personal Debt | Business Debt |
|---|---|---|
| FDCPA Applies? | Yes (strict rules) | No (fewer restrictions) |
| Can Call at Work? | No (if asked to stop) | Yes |
| Can Contact Third Parties? | Very limited | More freedom |
| Wage Garnishment | Varies by state — not allowed in Texas for ordinary debts | N/A (a business has no wages; garnish its bank accounts instead) |
| Exempt Assets | Many (homestead, car, retirement) | Fewer (business assets usually not exempt) |
| Credit Reporting | Yes (personal credit) | Yes (business credit via D&B) |
| Bankruptcy | Chapter 7 or 13 | Chapter 7, 11, or liquidation |
Key difference: the FDCPA (Fair Debt Collection Practices Act) applies to consumer debt — obligations incurred for personal, family, or household purposes (15 U.S.C. § 1692a(5)). Business-to-business collection sits outside its consumer-specific rules.
What this means:
- Commercial collection isn’t bound by the FDCPA’s consumer-specific procedures
- Contact can be more persistent, and can go to the business directly during business hours
- The account can be discussed with the people at the company responsible for paying it
Persistent is not the same as abusive. Every contact should stay professional and documented — that’s both how the law expects a commercial creditor to behave and what keeps the file credible if it ends up in front of a court.
But still can’t:
- Harass, threaten, or abuse
- Use profanity
- Misrepresent the legal status of the account
- Make threats that won’t or can’t be carried out
When Owners May Be Personally Liable Without a Guarantee
Situations Worth Checking Before You Write an Account Off
1. Owner is a Sole Proprietor or General Partner
- No liability shield to begin with
- The obligation is the individual’s
2. Debt Incurred Before the Entity Existed
- The obligation was taken on personally, then an LLC was formed later
- Forming an entity doesn’t retroactively move an existing obligation into it
3. The Contract Was Signed Without a Representative Capacity
- Signed “John Smith,” not “ABC LLC, by John Smith, Manager”
- How much that matters depends on the document and the facts — a question for counsel, not an assumption
4. Payroll Taxes
- Individuals responsible for collecting and paying over payroll taxes can face personal liability for the trust-fund portion
- That’s a federal tax matter for the IRS and a tax professional — it is not a remedy a private creditor can use, and it should never be raised as leverage
5. The Owner’s Own Wrongful Acts
- An entity generally doesn’t shield an individual from liability for their own conduct
- Fact-specific, and litigated
How to Identify Personal Guarantees
Before You Extend Credit
Question 1: “Who is the customer — an individual or an entity?”
- An individual: the obligation is theirs
- An entity: ask for a guarantee
Question 2: “Who is signing, and in what capacity?”
- An individual in their own name
- Or “ABC LLC, by John Smith, Manager” — entity only
Question 3: “Will an owner personally guarantee payment?”
- Yes: get it in writing, drafted properly
- No: price the risk accordingly, or reconsider the terms
Red flags when there’s no guarantee:
- Newly formed entity
- An owner who won’t sign one
- Thin capitalization relative to the credit requested
Collecting from Dissolved Businesses
When the Business Closes
Scenario: an entity owes you money, then dissolves
Your options:
Option 1: Move Before It Dissolves
- Aged accounts get harder, and a wind-down accelerates that
- Place or escalate the account while the entity still exists and has assets
Option 2: Look at the Transfers
- Where assets moved out ahead of creditors, fraudulent-transfer law exists for it
- That’s a claim, brought by counsel, on facts you can document
Option 3: Look at the Distributions
- A dissolving entity is generally supposed to satisfy creditors before distributing to owners
- Where that didn’t happen, there may be a claim — again, through counsel
Option 4: Write It Off
- With no assets and no guarantee, some accounts genuinely aren’t collectable
- Bad-debt treatment is a question for your CPA
Successor Liability
When the New Business is Really the Old Business
Scenario:
- ABC Services LLC owes you $50,000
- The owner closes ABC Services
- The owner opens XYZ Solutions LLC — same work, different name
- Clients, equipment, and employees moved to XYZ
“Successor liability” = a claim that the new business carries the old business’s obligations
What such a claim tends to rest on:
- The new business is a continuation of the old one
- Assets moved from old to new
- Common ownership
- The same line of business
- A timeline that suggests creditors were the reason
If it can be proven, the claim is brought against the new entity — as litigation, by counsel. The evidence is where these cases are won or lost, which is why the investigation matters more than the theory.
The Bottom Line
LLCs and corporations protect owners from personal liability — unless you hold a guarantee, or the facts support setting that protection aside.
Best practices for creditors:
- Get personal guarantees, especially for new or thinly capitalized entities
- Check the business structure before you extend terms, not after
- Document everything, because veil-piercing and transfer claims are won on records
- Act early — before the entity dissolves or the assets move
- Pursue the entity and any guarantor together where a guarantee exists
For business owners who owe money:
- An LLC or corporation does protect your personal assets
- A personal guarantee you signed removes that protection for that debt
- Commingling funds and ignoring formalities weakens the protection you formed the entity to get
- Moving assets ahead of creditors can be unwound, and it hands the creditor a far stronger claim than the invoice ever was
Alexander, Strauss & Associates: Commercial Collections
Piercing the corporate veil, fraudulent-transfer claims, and successor-liability suits are litigation. ASA is a collection agency, not a law firm — those are filed and pursued by licensed attorneys in the debtor’s jurisdiction, and we never engage in the unauthorized practice of law. Our work is what comes before and after:
- Reading the file for a guarantee, and identifying who is actually obligated on what
- Skip tracing and asset investigation — where a business went, what it owns, whether there’s anything worth pursuing
- Documented demand and negotiation with the entity and any guarantor
- Coordination with collection counsel where suit is warranted, and judgment enforcement once a judgment exists
- Straight answers about collectability, including when the answer is that an account isn’t worth what pursuing it would cost
- 25+ years of commercial collection experience; over $250 million recovered, with a 70%+ recovery rate on the accounts we accept
Corporate structures are the reason a lot of valid commercial claims go unpaid. Working them takes documentation and persistence rather than volume — and where an individual is genuinely obligated, that gets pursued through counsel, professionally, on the facts.
No obligation. No upfront cost. We only get paid when you get paid.
FAQs: Business vs. Personal Debt
Q: Can I sue the LLC owner if there’s no personal guarantee? A: Generally only if the facts support piercing the veil — commingling, ignored formalities, undercapitalization, fraud, or a transfer designed to defeat creditors. It’s litigation, and it’s fact-intensive.
Q: What if the owner signed the contract personally, not on behalf of the LLC? A: It can matter, and it’s worth having counsel look at the document. How a signature block reads is one fact among several, not an automatic result.
Q: Can I garnish the owner’s personal wages for LLC debt? A: In Texas, no — current wages for personal services are exempt from garnishment for ordinary debts (Tex. Prop. Code § 42.001(b)(1)), even with a personal guarantee or a pierced veil. Once wages are deposited into a bank account, ordinary post-judgment garnishment generally reaches them.
Q: What if the LLC has no assets? A: Then the question becomes whether anyone else is obligated — a guarantor — or whether assets left the entity in a way that supports a claim. Sometimes neither is true, and the honest answer is that the account isn’t collectable.
Q: How much does it cost to pierce the corporate veil? A: Enough that it only makes sense on a substantial balance. It’s contested litigation with discovery, so cost depends on counsel, the venue, and how hard the facts are to establish. Get a written estimate before authorizing anything.
Q: Can the owner declare bankruptcy to avoid a personal guarantee? A: A personal bankruptcy can discharge guarantee liability, though not in every case, and the automatic stay halts collection the moment it’s filed. Payments taken shortly before a filing can also be clawed back — a bankruptcy question for counsel.
Q: How long do I have to sue on a business debt in Texas? A: Most Texas commercial contract and open-account claims run four years from accrual (Tex. Civ. Prac. & Rem. Code § 16.004). See the Texas commercial debt statute of limitations reference.
Don’t let a corporate structure be the end of the file. Get a free case review →
General information for commercial creditors, not legal advice. Laws and deadlines change and depend on the facts — confirm specifics with qualified counsel.