What Is an External Claim

An external claim is a claim against an individual that does not arise out of any relationship he or she 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.

BREAKING DOWN 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 his or her interest in the business entity.

For example, if you were an owner in a corporation and negligently drove a company car into the side of a customer's building, the customer may sue the corporation and potentially you. To settle any judgment against you, this may include both your corporate assets and personal assets if the accident was not completely covered by insurance.

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 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.