The Internal Claim: An Overview

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 claims against the business.

Understanding the Internal Claim

Whether a business is a corner shop or a corporate giant, its founder may register the business as a legal entity distinct from its owner. This effectively protects the owner from being pursued for payment of any debts incurred by the business.

Key Takeaways

  • An internal claim 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 cannot repay.

Under U.S. law, registering a company as a limited liability company (LLC) is the usual means of obtaining that 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 for creating a corporation.

About 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.

An external claim cannot be brought against an LLP.

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 its business property is owned by a separate real estate trust.

The External Claim

Logically enough, a creditor's claim against a business when its owner is unable to repay the debt is known as an external claim. The external claim may be pursued even if the debt is entirely unrelated to the business and its operations.

Limited liability companies and limited partnerships are protected from such claims. Some states forbid external claims from being brought against any type of company.