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by Rick Thomas
Thomas & Thomas
Why is it important to know what kind of entity your dealing with?
It may be glaringly obvious, but the main objective in commercial collections is getting to the money and collecting it. Most debtors don't simply fork over the money after a phone call or letter. In order to determine the best strategy to use in approaching a recalcitrant debtor, the collector has to know what kind of a legal entity they are dealing with. The bottom line is that the creditor and its agents are limited to going after the assets of the entity that owes the money.
In most states, there are three types of entities recognized by the law. The first, and most simple, is a sole proprietorship. This is merely an individual carrying on a business. When dealing with a sole proprietor, not only are the assets of the business subject to the debts incurred, but also the personal assets of the proprietor. In essence, there is no legal distinction between business assets or business debts, and those the individual proprietor holds outside of the business. Thus, if a creditor has extended credit to a business which is a sole proprietorship, the creditor may look to all the assets owned by that individual to satisfy the debt.
The second kind of business entity is a partnership. In the majority of states, a partnership is considered the same as a sole proprietorship, except that the business is owned by more than one person. As in a proprietorship, the partners in the partnership are personally liable for the partnership debts, and creditors of the partnership may look to the personal assets of any of the partners to satisfy the business debts. Another term that comes into play with a partnership is joint and several liability. The term joint and several means that each partner is fully liable for any debts of the partnership. In essence, even if a particular partner only owns a 20% interest in the business, that 20% partner can be held liable for 100% of the debts of the business. Some states have tempered this liability by allowing the formation of a Limited Liability Partnership (ALLP@). In states that recognize an LLP, there is named a General or Managing Partner, who is liable for 100% of the partnership debts. The other ALimited@ partners are only liable up to the amount of their individual contribution to the LLP.
The third type of legal entity is a corporation. Many states recognize several types of corporations, known as Limited Liability Corporations (ALLC@), Professional Corporations (APC@), Professional Service Corporations (PSC), Professional Limited Liability Corporations (APLLC@) or Non Profit Corporations (ANP@). The distinction doesn't matter from a collection perspective, as the owner(s) or shareholder(s) of the corporation are NOT personally liable for the debts of the corporation. Only the assets of the corporation are subject to the corporate debts. For this reason, a creditor can extend credit to a corporation personally owned by a millionaire, but if the corporation becomes insolvent, where its liabilities exceed its assets, the creditors will not be able to collect the money.
Mr. Ernest Thomas, III
Thomas & Thomas
2323 Park Ave.
Cincinnati, OH 45206
Phone: (513) 961-5311 Ext. 103
Fax: (513) 961-0075
Email: rick@tt-law.com |
