Whether you are starting up or already running, it is important to understand how to avoid inadvertently creating personal liability when contracting for your business.** Although there are some situations where personal liability is unavoidable–such as obtaining financing–there are some tips for avoiding personal liability in other situations:
**Keep in mind that this is general information, make sure that you consult an attorney about the law applicable to your circumstances.
1) Pre-formation – An entity can’t be liable for contractual obligations before it exists. Thus, the person signing the document on behalf of the entity (the Organizer) assumes personal liability for any pre-formation commitments. To avoid this, set up your entity prior to making any obligations on behalf of the company.
HINT: If an Organizer has assumed personal liability pre-formation, it can be removed if (1) the entity assumes the contract or benefits from it AND (2) the creditor releases the Organizer from their personal obligation (referred to as “novation”). The second criteria is often hard to obtain, so make sure you carefully weigh the risks before signing pre-formation.
2) Sign in your official capacity – Always sign your document in your official capacity.
Examples of signing in your “official capacity”:
Hint: If your company name is not present, write it in!
Hint: Avoid using “commitment” terms and phrases such as “I agree” (a term that bound a company when it was only intended to convey that both parties held the same position on a single term to be included in a contract) and “I accept.” It is also helpful to indicate in any emails that you send concerning negotiations that you have no intent to be bound by email/electronic signature (be careful placing this disclaimer in all email footers as you may dilute the “intent” protection through global use).
Keeping the above in mind will help you avoid common situations in which personal liability arise.