Business Debt and Personal Liability - Restructuring Advisory Group

If you are a business owner and your business is facing some financial hardships, one of the things that you are likely to be worried about is whether your creditors can come after your personal finances such as your personal bank account, your wages or even your house. The first thing to do here is to figure out whether you are liable personally for the debts that your business has accrued. Remember that debts that your business is liable to pay and debts that you are personally liable to pay are two very different things. Therefore, you must determine what debts you personally are liable for.

The most important thing to know here is that if you have employees, regardless of whether your business is a partnership, LLC, sole proprietorship or corporation, and it has withheld taxes from their wages, you are personally liable to pay these taxes if the business does not pay them. Apart from this as far as any other type of business debt is concerned, what determines your personal liability is the structure of your business and the type of purchase order or contract you signed.

Partnerships and Sole Proprietorships

If your business is structured as a sole proprietorship or a general partnership, you are legally the same as your business and therefore, are personally liable for all the debts that the business has. There is a twist in partnerships. The personal liability of each partner is 100%, i.e. the creditors can take everything from one partner to pay the entire debt, not just a pro-rated amount.

LLCs and Corporations

If your business structuring is that of a LLC or corporation, you are a separate legal entity from your business. What this means, at least in theory, is that you have no personal liability as far as your business debts are concerned and the creditors can’t come after your personal financial assets.

In real life, however, this is not at all a common situation. LLC members or shareholders often become liable for a business debt through various means. Some of them are putting up property as collateral, offering a signed personal guarantee, getting personal loans or credit cards and using them to provide funds for the business, using your own name to sign a contract, misrepresenting, perpetrating fraud or keeping records in a sloppy and disorganized manner.

If you do find yourself personally liable for your business debts, you can negotiate a settlement for the business to pay the debts off. Another option you have is to file for Chapter 7 bankruptcy which will get rid of your business debts or your personal liability.

Article Published by Restructuring Advisory Group

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