Personal Liability For Business Debts

Am I Personally Liable For Business Debts?

If your business is in financial turmoil, you may be concerned as to whether a creditor can come after your personal assets. May a creditor raid your personal bank account? Garnish your wages? Foreclose on your home? In order to answer these questions, it is necessary to understand whether you may be held personally liable for your business debts.

There is a distinct difference between debts that only your business is responsible for and those that you are personally responsible to pay from your personal assets. In the event that you are not personally liable for your business’s debts, you have a lot less to be concerned about, as a creditor may only go after your business bank account and assets if your business does not pay its bills. Thus these means that creditors cannot foreclose on your home or other personal property. Conversely, if you are personally liable for your business’s debts, you have a lot more to lose.

Which debts am I personally liable for?

It is important to note that every business owner who has employees, whether the business is a corporation, LLC, partnership or sole proprietorship, is personally liable if the business does not pay the taxes withheld from employees’ paychecks.

With respect to other types of business debts, your business structure and what kind of contact or purchase order you signed generally determines whether or not you are personally liable for a business debt.

Sole proprietorships and partnerships

An individual that operates a sole proprietorship, is legally treated as one entity. This means that that individual will be personally liable for every penny that the business cannot pay. Which ultimately means that if your business cannot pay creditors, the creditors may come after your personal property in order to satisfy the debt.

This is also true for general partnerships. Each partner is personally liable for the partnership debts, with this added twist:- each partner is personally liable for 100% of the business debts. Essentially this means that if there isn’t enough assets to satisfy the partnership debts, and the partners are broke, creditors may attach the personal property of the partners in order to pay all of the business debts, not just each partner’s pro rata share of the debts.

Corporations and LLC’s

Corporations and LLC’s have their own personalities. Meaning that they exist independently from the individuals that operate them. Thus in theory, these personas could have no personal liability for the debts of the business.

However, there are several ways in which a shareholder or LLC member may become personally liable for business debts, in fact a lot of small businesses are personally liable for at least some of the business debts.

Below is a list (this not a comprehensive list) of the most common ways in which an owner of a corporation or LLC may become personally liable:

Most banks, suppliers and landlords won’t extend credit or loan money to a small LLC or corporation without the owner’s personal guarantee. In these circumstances, and if you have signed a personal guarantee for your business, it means that creditors may come after you personally if your business is unable to satisfy its debts.

Another way that you may become personally liable for the debts of your corporation or LLC is if you offered your personal property as collateral in exchange for a loan or extension of credit.

If you have signed a contract in your personal name and not that of the corporation or LLC you may have also given up your limited liability.

Thus, if you are an owner of a corporation or an LLC you would have to take extra care in your dealings with creditors and the terms of your contract with those creditors, as if you are not careful, you may no longer have a home.

Also see:

What Is Chapter 11 Bankruptcy?

Chapter 11 Bankruptcy