Can You Be Held Personally Liable for Business Debts?

Can You Be Held Personally Liable for Business Debts?All businesses have their ups and downs. Choosing the right type of business entity can help shield your personal interests and finances should business debt become an issue. Whether you’re a longtime business owner or just starting out, a corporate business attorney can help you understand your rights and advise you on the best course of action to protect yourself.

Business Entity Formation

Choosing an entity that best fits your business and personal needs can help protect your personal assets. That is why it is critical to get the input of a lawyer who has vast knowledge of different business entities and the benefits and drawbacks of each type. Sole proprietors and partners in a partnership are more likely to be held personally liable for business debt, while those who have ownership interests in entities such as corporations and limited liability partnerships enjoy certain protections against personal liability.

Business Succession Planning

A business succession planning lawyer can also assist you with creating an exit plan for your business that ensures your personal interests are protected should your business have to close, you become incapacitated, or decide to retire with outstanding debt.

Business Debt Liability Exceptions

There are exceptions to the protections of these business entities. For example, particular tax debts must be paid by interest holders if a business does not fulfill its duties. Creditors may be able to seek payment from interest holders if fraud occurs. If a business keeps poor records or does not follow required corporate formalities, shareholders may be personally liable for certain types of debt.

Personal Guarantees

Signing a personal guarantee can also expose you to personal liability for business debts. When a lender or lessor knows that a small business does not have many assets, they may ask for a personal guarantee, which gives them the right to pursue an owner’s or shareholder’s personal assets if they default on a loan. Some common types of loans that require a personal guarantee include:

  • Loans for purchasing real estate
  • Leases for retail or office space
  • Financed or leased equipment
  • Supplies or materials purchased on specific terms of credit

Dealing with Personal Business Liability

It is not uncommon for someone who is personally liable for a business debt to eliminate it by filing Chapter 7 Bankruptcy. However, you must meet certain income requirements and your consumer debt will also be taken into consideration. In addition, filing bankruptcy affects your personal credit score and can impede your ability to obtain a loan or credit for years. Before filing any type of personal or business bankruptcy, it is vital to have a local bankruptcy attorney evaluate your financial circumstances and help you determine whether it is your best option to avoid personal liability.

If you need help forming a business entity that can protect you from personal liability or dealing with unmanageable debt, our experienced team at Carosella & Associates can help.