How the ABC Protects the Business Owner From Personal Liability

One of the most important questions for a business owner contemplating an ABC is personal liability. If the business can’t pay its creditors, will the owner be personally responsible? The answer depends on several factors — and the ABC itself provides some important protections.

Corporate Liability Shield

If the business is properly structured as a corporation or LLC, the owner’s personal liability for business debts is generally limited to their investment in the entity. The ABC’s orderly liquidation process demonstrates that the business made good-faith efforts to maximize creditor recovery — which supports the argument that the corporate form should be respected.

Personal guarantees are the exception that changes everything. Many business loans, commercial leases, and vendor agreements include personal guarantees from the business owner. Those guarantees survive the ABC — the owner is personally liable on guaranteed debts regardless of what the business estate pays. Understanding which debts are personally guaranteed is essential before making an ABC, because those creditors will pursue the owner individually after the assignment closes.

The California ABC System gives business owners and creditors the exact tools, templates, and step-by-step guidance to navigate an Assignment for Benefit of Creditors — faster and cheaper than bankruptcy, without a federal court filing. Request your free evaluation here.