Internal Claim

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Updated July 25, 2022

What Is an Internal Claim?

An internal claim is a legal demand for payment that may be satisfied only from the assets of a business and not from the personal assets of the business owners. A business can be created as a separate entity in order to shield the assets of its owners from lawsuits and claims against the business.

Key Takeaways

An internal claim is a legal demand for payment that is brought against a company and cannot be pursued against the company's owner or owners.
A business structure such as a limited liability company shields the company's owners from being held responsible for its debts.
An external claim is the opposite: A company is sued for payment of a debt the owner(s) cannot repay personally.

Understanding an Internal Claim

Whether a business is a corner shop or a corporate giant, it may be registered as a legal entity distinct from its owner(s). This status effectively protects the owner, or any shareholders for that matter, from being pursued for payment of any debts incurred by the business. Offering a sort of wall between the property and assets of the owner or owners of a business and the assets of the business, it limits what a creditor can expect to obtain in any legal action or claims.

Under U.S. law, registering a company as a limited liability company (LLC) is the usual means of obtaining this sort of protection. The LLC is a hybrid of two other business structures: the corporation, and the partnership or sole proprietorship. Laws regulating LLCs vary from state to state, but their pertinent feature is that they shield their owners' assets from claims brought against the company.

The LLC is a particularly popular choice among small business owners because the process of registering one with a state is less costly and less onerous than the process involved in creating a corporation (which also offers limited liability: Shareholders may take part in the profits through dividends and stock appreciation but are not personally liable for the company's debts or obligations).

LLCs vs. Partnerships

On the other hand, a business that is created as a general partnership offers no such protection to its owners. In a partnership, the partner-owners manage and control the business and all the business revenue flows directly to them. The partners also are personally responsible for any debts and other liabilities that arise from the operation of the business.

A variation on this structure is the limited partnership. This is a business owned by two or more people. The general partner actively runs the business while another, the limited or silent partner, provides financing but takes no active role in the business. In this case, the general partner has unlimited personal liability for the debts of the business while the limited partner is protected.

There are other ways to shield a business, or parts of a business, from claims. For example, a business may be owned by a corporation, while the property it uses to conduct that business is owned by a separate real estate trust.

External Claims

Logically enough, the opposite of an internal claim is called an external claim. An external claim is one brought by a creditor against a business when its owner is unable to repay the debt—even if it's unrelated to the company or the individual's ownership stake. Limited liability companies and limited partnerships are protected from such claims. Some states forbid external claims from being brought against any type of company.

A creditor may pursue an external claim even if the owner's debt is entirely unrelated to the business and its operations.

What's an Example of an Internal Claim?

Say a young company, owned by a married couple and organized as an LLC, borrows money from a bank to finance a new business line. The new business doesn't succeed, leaving the company so destitute that it defaults on its bank loan. The bank can file an internal claim against the company—probably in the shape of obtaining a court order—to recoup some of the borrowed funds. This claim would allow the bank to seize and sell the assets of the company (such as they are), but it wouldn't allow the bank to go after the owners' personal assets—their home, brokerage account, bank account, etc.

What Is Limited Liability?

Limited liability is a legal structure for organizations, which limits the extent of an economic loss to assets invested in or owned by that organization; it that keeps the personal assets of investors, owners, and other stockholders off-limits. There are several types of limited liability structures, including limited liability partnerships (LLPs), limited liability companies (LLCs), and corporations.

What Is External Claim?

An external claim is a claim for funds or other relief brought against an individual that may be unrelated to their business or ownership of a company—but that, nonetheless, has the potential to include or target their business assets. It is the opposite of an internal claim.

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