Paypal and an LLC - may I be held personally liable for the debts of my corporation?

[jameson79]

I started a web-based business about two years ago. It's completely part-time, and it doesn't really make any money, but I get a decent size tax write off that keeps me from being disqualified for financial aid (I'm a full-time student). I use a Paypal business account for my payment processing, and have done everything through my LLC's EIN.

Here's my issue: suddenly I've almost tripled my normal sales of gear that I sell from a local supplier. I've never had a high complaint/chargeback rate, however I'm running about a week behind and, instead of waiting for an e-mail response (which I do within 24 hours unless it's the weekend), they do a chargeback. Not a complete big deal, however I haven't had any for this month and suddenly I had 5 within 24 hours. 3 of which I refunded instantly, 1 of which had already been shipped, and the last one I don't think was a chargeback - said something asking what they bought and where they asked me to ship it - though they still held the funds.

Today I went to buy product to find out my card was declined. I got home and logged on to paypal and found out my account was restricted. I clicked on the resolution center and it asked me to do a bunch of stuff, some of which I didn't quite understand so I called them. They want me to confirm MY social security number, provide proof of delivery for my last 5 items sold, provide supplier contact info, and provide invoices of supply for the last 6 months. This isn't really a problem but, now I can't buy any product and I can't ship any either (shipping manager is restricted as well). So now they want proof of shipment for the last 5 items sold (which I can't buy or ship), and it will take over a week before it's resolved. By then, I'll have a lot more chargebacks and this whole venture becomes more of a headache than a part-time business.

All of that said, here is my question - what is the liability of just saying "eff it"? I feel that paypal has effectively (if only temporarily) shut down my website so if I were to decide to give up and let paypal deal with the repercussions involved, what personal liability do I have if I had set it up through an LLC? There is money in the account, but not enough to settle all of the chargebacks. Now I would explain to all the customers the situation and let them know how to deal with it, however, I don't want Paypal trying to sue or attacking my credit personally. Any suggestions?

Thanks!

[Modee]

One of the primary purposes of entities such as LLCs and corporations is to eliminate personal liability. Now, the reason PP is asking for your SS # is probably because your LLC has no corporate credit record. You are actually lucky that you got this far without providing it, because PayPal rarelt accepts an EIN in lieu of a social security number. But this has nothing to do with your underlying question about whether you could end up liable personally for debts of your LLC. Supplying your personal SS # does not put you on the hook personally UNLESS PayPal's Terms of Service state that you will become a personal guarantor for any debts incurred.

So back to your question about whether you could get personally stuck for the LLC's debts: It is black letter law that for the most part absent fraud or that the entity is a sham (the alter ego theory - that the corporation is nothing more than a front for a single individual) the corporate veil of protection may not be pierced.

If you want to get into this topic deeper, and analyze your specifics, I suggest tech support.