External Claim

External Claim

Investopedia / Laura Porter

What Is an External Claim?

An external claim is a claim against an individual that does not arise out of any relationship one may have to a business in which the individual has an ownership interest. Depending on how the business is owned, the creditor may be able to legally pursue assets of the business to satisfy the external claim against the individual business owner/debtor. Limited liability and limited partnership agreements help protect the business asset's from external claims assuming the individual's debt is in incurred outside the business.

Key Takeaways

  • An external claim is the potential for business assets to be included in a claim against an individual.
  • Limited liability companies and limited partnerships help protect business assets from claims against an individual resulting from incidents occurring outside the business.
  • The individual and corporation may have to pay a debtor if the individual was acting negligently on behalf of a company when the incident occur.

Understanding an External Claim

Simply setting up a business in an entity, such as a corporation, may not protect it from the owner's personal creditors. External claims against a business owner may be satisfied by their interest in the business entity.

However, some entities, such as limited partnerships (LP) and limited liability companies (LLC), provide their partners/members with protection from claims arising outside of the entity. Many states only give outside creditors the right to attach or garnish distributions made from the business to the debtor (business owner or partner) and do not allow the creditor to attach or sell the debtor's interest in the entity. Under this legal scenario, management control of the entity remains intact and the debtor's interest in the entity is protected.

External Claim Example

Assume the owner of a corporation negligently drives a company car into the side of a customer's building. The customer may sue the corporation, and potentially the individual (business owner driving the car). To settle any judgment against the business and the individual, corporate assets and personal assets may be included in the settlement if the accident was not completely covered by insurance.

If a business owner negligently drives their own car into a building while they are not working, then the building owner would have no claim against the business owner's corporate assets, but they could certainly sue the individual (driver).