If your business has been going through a tough time, you’ll know how quickly the debts can pile up. No matter how hard you try sometimes you simply can’t make ends meet. The problem is, if your business isn’t making any money then chances are neither are you. So what happens to your debts? Are you personally liable for them?
It usually comes down to how your business has been set up:
Sole proprietors and partnerships may be liable
This means that you can be forced to use your own personal funds to settle debts owed by the business. In the eyes of the law, there is no difference between a business owner and a business entity for sole proprietors and partnerships meaning creditors can come to you directly for the money they’re owed.
This is one of the biggest benefits of setting up a limited company or an LLC as it offers you protection against personal liability. As the name suggests your responsibility is limited since the business is seen as its own separate entity.
Even if you have an LLC, you may still be liable for some debts
There are certain situations where you can be personally liable for debts, even where you’re set up as a corporation. This includes:
- Payment of employee-withheld taxes to the IRS
- When you’ve given a personal guarantee. You may have done this when you’ve taken out a loan or signed up for a lease
- You’ve mismanaged the LLC in such a way that it’s no longer treated as a separate entity
If you have building debts in your business that you cannot find a way to pay off, applying for bankruptcy may be the answer. It doesn’t necessarily mean you have to close; you’ll need to take some advice on your legal rights.
Applying for bankruptcy for your business can be a stressful and emotional process. You can make your life easier and protect yourself with some legal help.