Whether or not you are liable for business debts accrued depends on the structure of the business. Sole proprietorships, partnerships, corporations, and LLCs all handle the problem in different ways.
You are a sole proprietor if you are the only owner and have not incorporated or set up a separate business entity. In a sole proprietorship, the business is not a separate legal entity, meaning you and your business are considered to be one and the same. You will be equally liable for debts incurred by the business, and creditors can go after personal assets as well as business assets. If your company does not have enough assets to pay off the business debt, the creditors may go after your house, car, or other personal property.
A partnership is an unincorporated business entity shared by two or more people. Whether or not you are personally liable for the business debts depends on what type of partnership you formed.
General Partnership: A general partnership is created when two or more people decide to work together for profit. It does not even require paperwork to form. In this type of partnership, each partner is considered a general partner and is equally liable for the business debts.
Limited Partnership: A limited partnership includes at least one general partner and one or more limited partners. The general partner(s) are personally liable for the business debt, while the limited partner(s) are not.
Limited Liability Partnership (LLP): A main purpose of LLPs is to protect the partners from personal liability for business debts. However, it is possible that certain circumstances bypass this protection, such as debts arising from contracts such as business loans or credit cards.
Corporations are designed to limit the liability of their owners (shareholders) by becoming separate incorporated entities. When a corporation is in debt, the creditors can only go after the assets of the corporation. Shareholders can become liable if they cosigned or personally guaranteed the debt. They can also become liable if they intermixed personal and business funds or otherwise failed to follow corporation formalities. These occurrences are called piercing the corporate veil.
Limited Liability Company (LLC)
LLCs also provide limited liability to their owners (members). Similar rules apply as stated above under corporations, where a member can become liable by piercing the corporate veil.
If you have any further questions concerning how your business debt could affect your personal finances, or would like to set up a new business structure, call Hathaway Law today. Our legal team would be happy to answer any questions you might have and help you figure out the best steps to take with your situation.
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