October 23, 2026
Usually not. A corporation's debts belong to the corporation, and its stockholders, directors and officers are not personally liable for them just because the company can't pay. The exceptions are the ones founders create themselves or that statutes impose: personal guarantees you signed, contracts you signed in your own name, a court disregarding the corporation because you didn't treat it as separate ("piercing the veil"), unpaid payroll taxes and in some states unpaid wages, and decisions made when the company is insolvent that favor insiders over creditors. When the money runs out, you can hibernate the company, dissolve it in an orderly way, make an assignment for the benefit of creditors or, rarely, file for bankruptcy.
Key takeaways
A corporation is a separate legal person. It signs contracts, borrows money and owes its own debts. Stockholders risk only what they paid for their shares, and directors and officers acting for the company are not parties to its contracts. If your startup fails owing a vendor $50,000, the vendor's claim is against the company, and when the company has nothing left, the vendor usually loses. That protection is the main reason founders incorporate. It depends on you treating the company as separate and on not stepping into the exceptions below.
Personal guarantees. Landlords, banks, credit card issuers and some vendors won't extend credit to a young company without a founder's guarantee, and the guarantee makes you liable for the debt if the company doesn't pay. Look for "guarantor" or "personal guarantee" in leases, loan documents, corporate card applications and vendor credit applications. In New York, office leases commonly use a "good guy" guarantee, which limits the founder's liability to rent through the date the company gives notice and surrenders the space, if it follows the conditions.
Contracts signed in your own name. If you sign "Jane Smith" instead of "Acme, Inc., by Jane Smith, CEO," the other side may argue you are a party. The same goes for contracts signed before the company existed. Sign everything in the company's name with your title, and have the company assume any pre-incorporation contracts in writing. See Legal Documents Organized.
Personal cards and accounts. If company expenses go on your personal credit card, the card issuer's claim is against you. The company owes you reimbursement, but only as an unsecured creditor.
Delaware courts disregard the corporate form only in exceptional cases. They look at factors such as whether the company was adequately capitalized for its business, whether it was solvent, whether it observed corporate formalities, whether the dominant owners siphoned company funds or mixed them with their own, and whether the company was a mere facade for the owners, and they require an element of fraud or injustice. Being a small, closely held company with a dominant founder is not enough. Courts in other states apply similar tests, sometimes more readily, and a creditor may sue where you operate rather than in Delaware.
You make veil piercing close to impossible by keeping a separate company bank account and never paying personal expenses from it, signing contracts in the company's name, documenting board decisions with minutes or written consents, capitalizing the company reasonably for what it does and buying insurance for foreseeable risks. See Board Minutes.
Payroll taxes. The income and payroll taxes a company withholds from employees' paychecks are held in trust for the government. Under Internal Revenue Code § 6672, the IRS can assess the trust fund recovery penalty, equal to the full unpaid trust fund amount, against any responsible person who willfully fails to pay it. Responsibility turns on control over which bills get paid, not on title alone, and willfulness can mean simply paying other creditors while knowing the taxes were unpaid. Many states have parallel rules for state withholding.
Unpaid wages. Some states make individuals liable for unpaid wages. New York's Business Corporation Law § 630 lets employees hold the ten largest shareholders of a privately held corporation, including a Delaware corporation for work performed in New York, personally liable for unpaid wages once they have tried and failed to collect from the company. California Labor Code § 558.1 allows an owner, director, officer or managing agent who causes certain wage violations to be held liable as the employer. Federal wage law can also treat officers with operational control as employers. This is one reason to set founder salary at zero in writing rather than accrue deferred salary; see Founder Salary and Startup Employment Law.
Sales tax and other statutes. Many states hold officers personally liable for sales tax the company collected but didn't remit. Certain environmental and securities laws can also reach individuals who control a company.
Under Delaware law, directors' fiduciary duties continue to run to the corporation even when it is insolvent or close to it. The Delaware Supreme Court held in North American Catholic Educational Programming Foundation v. Gheewalla (2007) that creditors cannot bring direct fiduciary duty claims against directors, but once the corporation is actually insolvent they gain standing to sue derivatively, on the corporation's behalf. In practice, that means creditors become the people most likely to second-guess the board's decisions. See Fiduciary Duties.
The trap is paying insiders first with the last of the cash: repaying founder loans, paying accrued founder salary or bonuses, or reimbursing founder expenses while vendors go unpaid. Those payments invite fiduciary claims, can be unwound as fraudulent transfers, and in a bankruptcy can be clawed back as preferences if made to insiders within a year. Founder loans should be documented with a board-approved promissory note when made, so they are clearly debt rather than a capital contribution, but even documented insider debt shouldn't jump the line once the company is insolvent.
Directors and officers insurance matters most here. When a company can't indemnify its directors because it has no money, a D&O policy's Side A coverage can pay their defense costs. Keep the policy in force, and buy a tail when you wind down. See Insurance and Accounting.
Hibernation. If you might restart, or are waiting on an asset sale or a tax refund, you can keep the company alive with no operations for about $450 a year to Delaware for most startups (the $400 minimum franchise tax under the assumed par value capital method plus the $50 annual report fee), plus your registered agent's fee. You still have to file tax returns and keep any state qualifications current, and a California qualification brings its $800 minimum franchise tax.
Orderly dissolution. Delaware's dissolution statutes let the board wind down under a court-supervised notice procedure (DGCL § 280) or adopt a plan that makes reasonable provision for known, pending and reasonably likely claims before paying anything to stockholders (DGCL § 281(b)). Directors who follow either path are protected from personal liability to claimants, and a stockholder's liability for unpaid claims is capped at the lesser of its pro rata share of the claim or the amount it received in the liquidation. Creditors are paid before stockholders. See How Do I Shut Down My Startup?
Assignment for the benefit of creditors. In an ABC, the company assigns all its assets to an independent assignee, who sells them and distributes the proceeds to creditors under state law. It is usually faster and cheaper than bankruptcy, and it is a common route when there are assets or IP worth selling.
Bankruptcy. Chapter 7 liquidation is rare for venture-backed startups because it is expensive and slow and hands control to a trustee, but it can make sense when there are disputed claims or a need to stop lawsuits.
Example. A New York startup has $160,000 in the bank and is winding down. It owes $40,000 in final wages and payroll taxes, $55,000 to vendors, and 16 months of rent at $12,000 a month, $192,000, on an office lease the founder guaranteed with a good guy guarantee. The founder has $18,000 of company expenses on her personal credit card.
The board pays the $40,000 of wages and payroll taxes first, which removes the founder's trust fund and wage exposure. It gives the landlord the 90 days' notice the guarantee requires and pays rent through surrender, 3 months at $12,000, or $36,000, which ends the founder's guarantee, and the landlord signs a surrender agreement releasing the company from the remaining rent. It pays the $55,000 owed to vendors in full and reserves $10,000 for final tax returns, Delaware filings and wind-down costs. That leaves $19,000, from which the company reimburses the founder's $18,000 card balance, and the last $1,000 goes to stockholders.
Now reverse the order. If the founder had reimbursed herself first and the company then ran short on rent, the landlord could have collected from her under the guarantee, and creditors could challenge the $18,000 as an insider payment. The same dollars, paid in the right order, leave her with no personal exposure.
For more, see How Do I Shut Down My Startup?, Fiduciary Duties, Board Minutes and Insurance and Accounting.
If your company is running low on cash and you want to understand your personal exposure, contact us.
