If you own a business that's struggling with mounting debt, you may be wondering if, or how business debt could affect your personal finances. It's true that oftentimes business owners and especially sole proprietors can carry personal liability for their business’s debt. If that's something you're concerned about, let's take a look at when a business owner may be liable for business debt.
What is Your Business Formation?
A business's formation is one way to determine whether an owner or stakeholder may be personally liable for business debt.
- Sole proprietor. In most cases where a business is owned by a sole proprietor, the owner is personally liable for any business debts. If you're concerned that you cannot pay your business debt, you may be facing Chapter 7 bankruptcy.
- Business owned in a partnership. While it does depend on several factors, such as the types of partnerships, partners who share ownership of a business can often be personally liable for business debt.
- LLCs, corporations, and other hybrid entities. Hybrid entities can often shield personal responsibility for paying business debt, although exceptions do apply. When a court holds a corporation's owners, members, and shareholders personally liable for business debt, this is called "piercing the corporate veil."
Have You Signed a Personal Guarantee?
If a business owner or stakeholder signs a personal guarantee for a line of credit, leasing agreement, loan, or a merchant cash advance, that person is personally liable for the debt if the business fails to pay it. The only way to navigate around that personal liability is to obtain a court order that relieves the person of this liability.
Have You Pledged Personal Property as Collateral?
If a business owner or stakeholder pledges their own property — whether that be a home, a vehicle in their name, or another personal asset — as collateral for a business debt, that property can be seized by the lender in the event that the business fails to repay that debt.
Other Situations Where a Business Owner May Become Personally Liable for Business Debt
While signing a personal guarantee or pledging personal property are two of the most common ways to become personally liable for business debts, there are a number of situations that can lead to personal liability. Some of those situations include:
- Failure to pay 941s, which are employee payroll withholding taxes
- Failure to pay state sales or franchise taxes
- Failure to properly terminate UCC lien notices
- Signing a contract or agreement in your name, not your legal business title
- Allowing the corporate veil to be pierced
What Can You Do if You Are Concerned That You May Be Personally Liable for Business Debt?
If you are concerned about your personal liability for business debt, it's important to know that you have options. As always, it's best whenever possible to avoid defaulting on that debt. But if your business is struggling financially or if your debt is already in default, here are a few things to consider:
If the business debt is not yet in default
If the business debt is not in default, do your best to make sure the business pays the debt to prevent going into default. While this can feel overwhelming, especially if your business is struggling financially, keeping debts out of default is important. Check out these 5 Not-So-Easy Steps to Getting Your Business Out of Debt if you're not sure how your business can keep making those payments.
No matter what, do not make any payments on a personal debt with personal funds or using a personal account. The business must pay those debts to stay out of default and to prevent your personal liability for business debts. If you have personally paid for business expenses and have defaulted or are facing imminent default, you should seek counsel to determine the risk of piercing the corporate veil.
If the business debt is in default
If your business has missed any debt payments and you're concerned about your personal liability, it's always best to consult with an experienced business debt relief or business bankruptcy attorney in your state.
Do not hire out-of-state debt settlement or debt consolidation companies, as many of them are predators looking for ways to capitalize on struggling businesses. Reputable, trustworthy attorneys in your state will always offer a free consultation, where they will review your contracts and situation, and offer their experienced guidance for a successful resolution.
I've been personally sued or threatened by a business debt collector. What do I do?
If you have been threatened by a business debt collector or personally sued, you need to immediately consult with a licensed business debt relief attorney in your state. Predatory lenders are looking for ways to take money from business owners in crisis. Don't let that be you.
Seek reputable, experienced support from a business debt relief or a bankruptcy attorney who can immediately walk you through the legal documentation, collection process, and provide options to restructure the business debt in a way that protects your personal finances and assets.
Concerned about your personal liability for business debts? Get in touch with The Lane Law Firm, Texas's reputable business debt relief firm. Our team is here to provide options that protect your personal finances and offer the best possible outcome for your situation. Contact us online, or book your free consultation today.