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One of the most popular questions when business owners are struggling with their business debt is: are you personally liable for your business’s debts? This article discusses whether a business creditor can come after your house, bank account, or other property.
If your business is having issues paying its bill, you might be worried about creditors coming after your personal assets. For example, can a creditor come after your personal bank account, your wages, or foreclose on your home? In order to answer all of these questions you first have to understand there are debts which only your business is liable for, and those that you’re legally responsible for. For example, some credit cards require a personal guarantee which means a creditor can go after your business bank accounts and your personal bank accounts to resolve the debt. If you discover you’re personally liable for some of your business debts, you have a lot more to lose.
Which debts are you personally liable for?
Every business who has employees knows that its best to incorporate as a corporation, LLC, partnership, or sole prop. This allows you to create corporate veil which shields you from personal liability from your businesses actions.
Sole Props and Partnerships
If you operate as a sole prope, you and your business are legally the same. It means you are responsible for paying every penny your business cannot pay. If your business doesn’t have enough cash/assets, a creditor can come after your personal assets. This is also true for general partnerships, the partnership debt belongs to each partner personally. Each partner is personally liable for 100% of the business’s debt. If there aren’t enough business assets to pay the partnership’s debt, and the partners are broker, then the creditors can come after the partners personal assets to pay off ALL of the business debts – not just your pro rata share.
Corporations and LLC
If your business is organized as a corp/llc, your business is a separate legal entity. As such, in theory, you could have no personal liability for the debts of the business. It means creditors cannot take your house, or other personal assets to pay off your business debts.
There are some ways, though, that a shareholder, or LLC can become personally liable for business debt.
Personal guarantee: Most banks and landlords know that LLC members don’t have a personal liability for the corporation. As a result, they won’t extend credit or give money to a small llc, or new corporation, without the owner offering a personal guarantee. If you sign a personal guarantee for the loan/lease/contract, you promise you will pay it personally if your business did not. Every time you personally sign a guarantee, you are guaranteeing you will repay the debt – you are giving up your limited liability for that debt. You are allowing the creditor to sue you for your personal assets if the business is unable to pay the debt.
Offering property: Some banks will require corporations to put up their home/real estate as security for the loan. If you secured a business loan with your home, then it’s possible that if the business defaults they will come after your home and foreclose on your property and use the proceeds to pay off the debt.
Signing a business contract in your own name: You may also give up your limited liability if you are careless about signing purchase agreements and contracts personally. For example, if you sign the contract personally, without the name of the corporation – then it becomes a personal contract you signed – and thus you’re responsible for the debt.
Using credit cards/personal loans to fund the company: This is very common, business owners use credit cards and home equity loans to get funds in order to grow the business.
Fraud: If you misrepresented, or lied, about any facts when applying for a loan on behalf of the corporation, you can be held liable. If you fail to maintain a legal separation between your business and personal financial affairs – then creditors can hold your personally responsible for the business debts.
What should you do if you can’t pay debts you’re personally liable for?
If you’ve determined you’re responsible for some, or all, of your business debts, you risk being sued personally for the debt. If you think it’s likely you’ll be sued, you should make sure your business pays off the debt. If this is not possible, you could file Chapter 7 bankruptcy in order to wipe out your personal liability for your business debts.
Am I personally liable for debt of s corporation
It really depends. If you signed a personal guarantee on any of the companies debt, then you may liable for the debt of the S corporation. Typically, the purpose of a business entity like an S corporation is to make sure you’re not liable for what the company does. It creates a separation between you and the corporation, and the business affairs, so you aren’t impacted specifically by it.
In the event that you committed fraud, and it’s alleged that the debt is the result of the fraud, then you could be held liable. For example, if you took a loan out under a fraudulent guise, then it’s possible you could be personally held liable for debt of s corporation.
Is my business liable for my personal debt
It’s not likely in any normal scenario for the business to be liable for your personal debt.