Being a small business owner comes with challenges unique to the size and function of the business. The small business owner has to handle all the challenges of selling, delivering, financing, managing and growing the business with little or no staff, while trying to make it a success. The most important of all is to retain the interest of all stakeholders like customers, vendors and team to build momentum in a short span of time. We would like to offer some concrete, and often over-looked, suggestions on running your business that can make these challenges easier to handle. However, running a small business can be hugely rewarding both personally and financially.
Are You Personally Liable for Your Business’s Debts?
If your business is having trouble paying its bills, you may be worried about whether a creditor can come after your personal assets. Can a creditor raid your personal bank account? Garnish your wages? Foreclose on your house?
To answer these questions you need to understand whether you are personally liable for your business’s debts. There is a huge difference between debts that only your business is liable for and those that you are legally responsible to pay from your personal assets. If you are not personally liable for your business’s debts, you have a lot less to worry about: a creditor can only go after your business’s bank account and assets if your business cannot pay its bills; creditors cannot take your home or other personal property. But, if you find out you are personally liable for your business’s debts, you have a lot more to lose.
Which debts are you personally liable for? Most importantly, know that every business owner who has employees, no matter whether the business is organized as a corporation, LLC, partnership, or sole proprietorship, is personally liable if the business does not pay the taxes it withheld from employees’ paychecks.
Signing a Personal Guarantee
Because most suppliers, banks, and landlords know that shareholders or LLC members do not have personal liability for the corporation or LLC’s debts, they often will not extend credit or loan money to a small LLC or corporation without the owner’s personal guarantee. If you signed a personal guarantee for a particular loan, lease, or contract, you promised that you would pay it personally if your business did not. In other words, every time you personally guaranteed that you would repay a debt, you deliberately gave up your limited liability for that debt. You volunteered to let the creditor sue you to take your personal assets if the business cannot pay the debt.
Check to see if you signed a personal guarantee on all of your business contracts; for example, a loan for a business vehicle or business equipment, trade terms with a supplier, a bank line of credit, or a commercial lease.
Offering Your Property as Collateral
Banks typically require the owners of small corporations or LLCs to put up their house or other real estate as security for a loan. If you secured a business loan or debt by pledging property such as a house, boat, or car, you are personally liable for the debt, and if your business defaults on the loan, the lender or creditor can sue you to foreclose on the property and use the proceeds to repay the debt.
Signing a Contract in Your Own Name
You may also have given up your limited liability if you were careless about signing purchase agreements and service contracts. Sometimes these agreements display the personal name of the business owner without the name of the corporation or LLC. If you signed an agreement in your personal name and not on behalf of the corporation or LLC, you are personally liable for the underlying debt, even if it was the supplier’s mistake.
Using Credit Cards or Personal Loans to Fund the Business
You may have used credit cards or home equity loans to obtain funds for your business, which definitely means you are personally liable for those debts. (You are almost always personally responsible for making payments on your credit cards, even if they have your business name on them, under the terms of the application you signed.)
Fraud, Misrepresentations, or Sloppy Record-Keeping
If you personally misrepresented or lied about any facts when you were applying for a loan or credit on behalf of your corporation or LLC, you could be held personally liable for the debt. Likewise, if you failed to maintain a formal legal separation between your business and your personal financial affairs, creditors could try to hold you personally responsible for the business’s debts under a theory known as “piercing the corporate veil.”
JV LAW GROUP, LLP can assist you with the legal needs of your business.
If you have any questions or concerns about any of the items above, please do not hesitate to contact JV LAW GROUP.
