Personal liability: Overview, definition, and example
What is personal liability?
Personal liability refers to an individual’s legal responsibility for debts, obligations, or damages. When someone has personal liability, their own assets—such as savings, property, or income—can be used to cover financial obligations if they are unable to pay. This contrasts with limited liability, where only business assets are at risk.
For example, if a business owner personally guarantees a loan for their company, they are personally liable for repaying the loan if the business cannot.
Why is personal liability important?
Personal liability is important because it determines who is financially responsible when something goes wrong. For business owners, it means understanding whether their personal assets are protected or at risk. In partnerships and sole proprietorships, owners typically have full personal liability, meaning they are responsible for all debts and legal claims against the business.
For professionals like doctors, lawyers, or consultants, personal liability can arise from negligence or malpractice claims. Even if they operate through a business entity, they may still be personally responsible for damages if found at fault.
Understanding personal liability through an example
Imagine a sole proprietor running a marketing agency. Since the business is not a separate legal entity, the owner is personally liable for any business debts. If the agency cannot pay a vendor, the vendor can sue the owner directly and go after their personal bank account or property to recover the money.
In another example, a general partner in a partnership is personally liable for the partnership’s debts. If the business defaults on a lease, the landlord can demand full payment from the partner’s personal funds, even if the partner was not directly involved in signing the lease.
An example of a personal liability clause
Here’s how a personal liability clause might appear in a contract:
“The Individual agrees to be personally liable for any debts, obligations, or liabilities arising under this Agreement, including but not limited to amounts due in the event of non-payment by the business entity.”
Conclusion
Personal liability means an individual is legally responsible for debts, obligations, or damages, putting their personal assets at risk. Business owners, partners, and professionals should be aware of their potential liability and take steps—such as forming a limited liability entity or obtaining insurance—to protect themselves. Understanding personal liability is crucial when signing contracts, securing loans, or entering business relationships.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.