How to Avoid Personal Liability When Signing a Business Contract

As a business owner, signing contracts is a common practice in the course of doing business. However, it's essential to understand that signing a contract on behalf of your business does not always shield you from personal liability. Personal liability can arise when individuals fail to properly identify and distinguish themselves as acting in a representative capacity for their business entity. In Pennsylvania, there are strategies you can employ to protect yourself and avoid personal liability when signing a business contract.

1. Consider Business Entity Protection

It may seem obvious but it bears mentioning that this article applies only to businesses that have liability protection, such as a corporation, limited liability company or limited liability partnership.  A business owner of a sole proprietorship (“dba”) or general partnership cannot avoid personal liability for business contracts by naming their DBA or partnership as the contracting party.  If you are doing business, we highly recommend that you choose the right business structure, such as a limited liability company (LLC) or a corporation, to provide additional protection against personal liability. By operating as a separate legal entity, a properly formed business can shield you from personal responsibility for business debts and obligations.

2.  Identify the Company in the Contract

If you sign your name on behalf of a company but the contract fails to “identify” the company on behalf of whom you are signing, you could be held liable for the contract.  The law provides that the individual who signs the contract retains sole liability for the contract unless the company that he or she signed on behalf of was “named” in the document.

3.  Clearly Identify Your Role

When signing a contract on behalf of your business, always clearly identify your role within the company. Use your official title, such as "President," "CEO," or "Managing Member," to indicate that you are signing in a representative capacity. Including the name of your business entity next to your signature can also help to clarify that you are acting on behalf of the company.

4. Include Proper Contract Language

Ensure that the contract itself clearly specifies that you are signing on behalf of the business entity and not personally. This can be done by including language such as "by and through [Company Name]" or "on behalf of [Company Name]." List the company name above your name in the signature block in the contract.  Additionally, avoid using your personal mailing address, phone number, or email address on the contract; instead, provide the business's contact information.

5. Seek Out Hidden Traps within the Contract

The language in the body of the contract might include language that holds you liable along with your business even if you’re clearly signing on behalf of the business.  Look for any language that includes “personal guarantee”, especially if you’re asked to sign somewhere in the middle of the contract.  Cross out provisions that say that you and the business are “jointly and severally” liable under the contract.

Seek Legal Advice

If you are unsure about the potential personal liability implications of a specific contract, it's always wise to seek legal advice. The experienced business attorneys at Fiffik Law Group can review the contract, provide guidance on potential risks, and offer strategies to protect yourself from personal liability. Investing in legal advice upfront can save you from costly legal disputes down the line.