When your company has difficulty catching up on the bills, you’ll start to worry about creditors coming after your assets. There can be a big difference between personal and business assets, but when you’re personally liability depends on a number of factors.
Sole Proprietorships and Partnerships
If you operate a company as the sole proprietor, your personal and business assets are the same thing, legally. You’re liable for every penny of debt. Creditors can sue you and take anything that isn’t protected by law. Under general partnerships, all partners can be held liable for covering all of the indebted amount. Even if you only own 15 percent of the business, creditors can seize everything until the debts are paid in full.
Setting up your business as a legal corporation or limited liability company is a way to protect your personal property. You and your business are two distinct legal entities. Any debts that your business has don’t carry any personal liability for you. However, if you use personal property as collateral for a business loan, it can still be taken if you default.
If you’re interested in incorporating, contact the state office and register your business as a corporation. You will fill out some forms and pay some fees, which may take a while if you don’t hire a lawyer. On the other hand, doing this process yourself will save you several hundred dollars. If you have shareholders, you’ll probably want to be an S corporation for tax purposes. Otherwise, you can register as a C corporation.
Lenders and suppliers may be less likely to extend credit to smaller corporations, knowing they might have difficulty recouping costs in case of defaults. They may require your personal guarantee, which means you are also risking your own assets. If you’ve signed a personal guarantee on repayment, creditors can go after both your business and personal assets if you fail to honor the terms, regardless of whether the business is incorporated or not.
Contracts in Your Name
Anytime you sign an agreement or purchase order using your own name and signature rather than on behalf of your corporation, you can be held personally liable. Even if it was a mistake, your signature is binding. Be sure to sign everything per your role as a company officer, and make note of any documents that are personally signed as potential risks.
If you provided any false information on a loan or credit application for your business, even as a corporation, you could be subject to a personal lawsuit. Also, if you’ve failed to observe proper legal protocols for acting as a corporation, your business could be viewed as a sham and you could still wind up losing personal assets. It’s important that all legal formalities required for incorporation are observed on a continuous basis.
If you are personally liable for crippling business debts, you run the risk of losing both your personal and business assets. If this is a possible outcome, you may have no choice except to contact a bankruptcy lawyer and discuss your options.