I don't get it. You're a Delaware C-Corp. You don't owe anything, do you?
Don't take out a loan. Don't restructure your debts. Don't negotiate with your creditors. Don't sell your car. Don't take a loan from your parents. Don't incur anything more than nominal legal bills.
Collect your contracts and take them immediately to your personal attorney and have them reviewed before you attach your own personal credit to your business'. Doing so is almost certainly unnecessary. You are probably just fine.
You are a businessperson, but you're not thinking like one, and you are going to get screwed. When your company's creditors worked out contracts with your business, they understood that they were assuming the risk that the company might go out of business and be unable to pay. That risk was priced into your contract terms.
If people you've done business with are now telling you that you should stake your personal finances on the debts of your company, then, absent some poorly thought out up-front agreement you had with those vendors to the contrary, you're being taken advantage of. Perhaps we'd benefit from hearing more about who those people are.
As for the merchant account: well, the people saying you could be blacklisted sure sound credible, and maybe you should listen to them. But please also note that there are people on this thread saying you should sell your car or take out a loan to satisfy someone else's debts, and take all the advice you get here with a big grain of salt. It shouldn't cost more than a couple hundred dollars to have an attorney explain to you (not your company, not your cofounder) that you are almost certainly not liable for thousands of dollars of company debts.
Second all of that. It has since come out the person writing this is a minority shareholder of a C-Corp so his liabilities are much smaller than what it seemed to be like initially. It would be nice to know if he was/is a signing officer.
I think you are probably just dead wrong here. I'm prepared to find out otherwise when 'grellas comes in here and stomps on all our crazy speculatifyin', but I'm willing to stake some personal HN reputation on this assertion: what you are saying is crazy-talk.
What's at issue in this situation isn't the size of the stake in the company you own, but rather the fact that (say) Rackspace agreed to do business with your company and not you. For you to be on the hook for Rackspace/Company debts, Rackspace will have to convince a court that both you and Rackspace had an understanding that you were the one making a hosting agreement. Against that will be the fact that they invoiced your company, accepted payments for your company, signed a contract with your company, and that the service they provided was used solely for your company.
Since companies go out of business all the time, my guess is that this never happens. Why would Rackspace waste time going after company debts when 99% of the time they'll never see a dime, and, on occasion, may risk legal action themselves by bringing frivolous lawsuits?
There are situations where you can slip up and obligate yourself to your company's creditors; if you Google, you'll find out for instance that in Iowa you want to be very careful about how your company's checks are layed out and signed. But it is not the case that "if you just slapped something together on Bizfilings.com you're probably not protected". Generally, for contacts: limited liability corporation is a limited liability corporation.
Yes, in other words, if Rackspace decides to sue you for running a company that was a fraud, then having a company doesn't shield you from fraud liability.
This makes perfect sense. Incorporation isn't the secret trick for conduct risk-free confidence jobs on people. You can't incorporate, sell Springfield the sham monorail, and skip town scot-free. Obviously, if your company is a criminal enterprise, all bets are off. On the other hand, the laws that provide alter ego liability aren't the secret key to unlocking corporate liability shields.
Since (a) the poster's company almost certainly wasn't a fraud, and (b) most companies that fail also aren't likely to be frauds, and (c) it is prohibitively expensive to attempt to prove in court that a company was a fraud, and (d) most of the officers of small startup companies aren't going to be in a position to pay at the end of a court battle, none of this matters.
Also: note how little of this has anything to do with how many shares the guy owns.
We are seriously geeking out here over something that isn't relevant to this guy's problem. Companies go out of business all the time; the company owners do not as a matter of course lose their houses!
I think that with 'under-capitalized' they had something else in mind than what you're reading in to it, and the fact that they probably are just two guys in a bedroom is what helps rather than hinders in this case, it is absolutely pointless to go after parties like that during collection, that's throwing good money after bad.
You're talking about spending 25 grand to recover three.
I agree with removing the ability to delete. Perhaps a "Redacted" button where the poster "taps out," karma hits are stopped, but the thread remains for those following the discussion. Maybe even having the thread optionally showing, like "dead" comments, would be ok. But I'm coming late to this conversation (late measured in minutes, not days), and there's no following it.
Second that this thing is unreadable now. I can't figure out what is going on other than some other people on HN know more about this situation than is in this thread.
There's an article on Google that lays out a bunch of tests that courts will use to determine that your corporation is a sham (for instance, if you mix your finances with the company's finances, perhaps by having the company pay your rent or buy your groceries). If you don't have a bona fide company, but rather a fraudulent scheme designed to shield you from personal liability, then the creditors of the company can pursue the shareholders of the company; this is an instance of "piercing the veil" called "alter ego liability".
It's also not relevant to your Internet startup owing Rackspace hosting charges.
Your comments on this submission have been excellent. Thank you.
Without starting everything up again, I'll just mention that the ability to pierce the veil depends some on which state you are set up in (pharma investors nearly insist on Deleware, FWIW).
It's very handy to delete comments to unwind flame wars. I've done it with people a bunch of times here. (If you disagree and it's important to you, let's take it to email rather than kick off a digression here).
Having a C-Corp, Delaware or no, does not remove personal responsibility. Let's say I form a C-corp and accept client's money. The company then just happens to spend all that money on me and not deliver any product or service. I believe that is still called fraud and the individual is still liable.
That may be a harsh example.
Business is still about people. Regardless of whether an individual's credit it tied to the company - and in this case I believe it is - these decisions affect his future ability to conduct business. These decisions affect his relationships with other people.
Telling everyone to take a hike may be a short-term solution. However, I believe finding a win-win solution among all parties is a long-term win.
So many things in this thread that make no sense to me. The guy is a minority share holder and acting in good faith, this is a completely different situation than a sole proprietorship with outright fraud.
These things are not related.
Thomas' advice may sound harsh but it is absolutely the most realistic approach here, he has to think about #1 for a bit and divorce himself from identifying corporate debt with private debt. He technically doesn't owe anybody anything as far as I can see and by assuming responsibility might actually make matters worse (because he is now at least acting as a signing officer of the company).
No, it isn't harsh at all, but I think that to people that have never been on or over the edge that it may sound harsh.
I had a stake in a Canadian gas station, the lady that ran it had signed up for some stupid carpet cleaning machine that they were paying through the nose for. She was complaining about how much it had cost and how many years they would still be under contract, it would have cost about 50 times what the p.o.s. was worth.
So I asked for permission to negotiate a solution, received it and called the company. I presented them with two options, $100 to buy out the contract (and keep the machine) or a very protracted collection procedure with 0 chance of success and a very large amount of bad publicity. The one phone call was all it took.
Business is not always being nice, and in this case the OP is being way too nice and is not looking out for his own interests as much as he should. The fact that his co-founder left him to rot is particularly galling.
Oh, and I think you meant 'wouldn't', not 'would'.
Corporate liability does not shield you from fraud, negligence, or other torts.
It most certainly does shield you from personal liability for debts the company incurred in good faith (meaning: virtually all the company's debts).
People on this thread are giving what seems to me to be some spectacularly bad advice. Do not throw your own personal finances down the toilet after your company's.
When a C Corp starts out it has no credit rating. You have to back it with your credit until the corporation can stand on it's own. Some of these debts will fall back to those who guaranteed them.
The corporation could file for bankruptcy and possibly the bankruptcy court could sort it all out, which sounds like the best thing for those involved.
That depends, if the board approves the compensation package and it does not run afoul of the letter of contract law, you are free to compensate yourself how you feel assuming that you are a for profit corporation. Generally contract law rules out over that situation though as generally contracts spell out you give me x and I provide you with y. Not delivering on the contract in a grossly negligent way could be fraud, but you would be surprised at the liberties one can take under the protection of limited liability, I have seen the worst of the worst operate within the confines of limited liability while just shying south of the fraud threshold. It is an art many sociopaths master.
it will /probably/ get you out of your rackspace debt. My experience with credit card processors is that you have to co-sign personally, even if you have a corp. So yeah, he can probably walk away from the rackspace problem, but he's almost certainly still on the hook for the credit card mess.
Don't take out a loan. Don't restructure your debts. Don't negotiate with your creditors. Don't sell your car. Don't take a loan from your parents. Don't incur anything more than nominal legal bills.
Collect your contracts and take them immediately to your personal attorney and have them reviewed before you attach your own personal credit to your business'. Doing so is almost certainly unnecessary. You are probably just fine.
You are a businessperson, but you're not thinking like one, and you are going to get screwed. When your company's creditors worked out contracts with your business, they understood that they were assuming the risk that the company might go out of business and be unable to pay. That risk was priced into your contract terms.
If people you've done business with are now telling you that you should stake your personal finances on the debts of your company, then, absent some poorly thought out up-front agreement you had with those vendors to the contrary, you're being taken advantage of. Perhaps we'd benefit from hearing more about who those people are.
As for the merchant account: well, the people saying you could be blacklisted sure sound credible, and maybe you should listen to them. But please also note that there are people on this thread saying you should sell your car or take out a loan to satisfy someone else's debts, and take all the advice you get here with a big grain of salt. It shouldn't cost more than a couple hundred dollars to have an attorney explain to you (not your company, not your cofounder) that you are almost certainly not liable for thousands of dollars of company debts.